Cromwell Property Fund Explanatory Memorandum & Notice of Meeting In relation to an offer by Cromwell Property Group to acquire, by way of a trust scheme, all of the units in the Cromwell Property Fund that it does not already own and so merge the Cromwell Property Fund into the Cromwell Property Group.
This is an important document and requires your immediate attention. You should read this document in its entirety before deciding how to vote. If you are in any doubt about what to do, you should consult your professional adviser without delay.
Your Independent Directors unanimously VOTE recommend that you vote in favour of the Merger, in the absence of a Superior Proposal.
Issued by Cromwell Property Securities Limited ABN 11 079 147 809, AFSL 238052, as responsible entity of Cromwell Property Fund ARSN 119 080 410 Contents
Important Notices 1 Independent Chairman’s Letter 4 What You Should Do 6 1. Key Information 7 2. Merger Overview 9 3. Summary of Independent Expert’s Report 13 4. The Merger Proposal 22 5. Risks of the Merger 30 6. Information about CPF 31 7. Information about Cromwell 38 8. Additional Information about Cromwell 48 9. Financial Information 49 10. Risks 56 11. The Meeting 59 12. Other Information 60 13. Definitions and Interpretation 64 14. Corporate Directory 67 Annexure 1 Investigating Accountant’s Report 68 Annexure 2 Taxation Report 77 Annexure 3 Independent Expert’s Report 83 Annexure 4 Fees and Other Costs 157 Annexure 5 Notice of Meeting 160 Annexure 6 Meeting Details and How to Vote 161 Annexure 7 Supplemental Deed 163 Annexure 8 Deed Polls 177
i Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting IMPORTANT NOTICES
Date You should consult your own independent professional tax This Explanatory Memorandum is dated 7 September 2012. adviser regarding the consequences of the Merger in light of your particular circumstances. Defined terms Responsibility statement Capitalised terms used in this Explanatory Memorandum and the Proxy Form are defined in Section 13 on page 64. CPF RE has provided, and is responsible for, the CPF Information in this Explanatory Memorandum to the extent Currency permitted by law and Cromwell and its directors, officers, employees and advisers do not assume any responsibility for Unless stated otherwise, references to dollars, $, cents or c the accuracy or completeness of the CPF Information. are to Australian currency. Cromwell has provided, and is responsible for, the Time Cromwell Information which relates to Cromwell before implementation of the Merger and to the extent permitted by Unless stated otherwise, references to time are to Brisbane law CCL, CDPT RE and their directors, officers, employees time. and advisers do not assume any responsibility for the accuracy or completeness of the Cromwell Information. Purpose of this Explanatory Memorandum The Cromwell Information which relates to Cromwell This Explanatory Memorandum is the explanatory statement after implementation of the Merger has been prepared by issued by CPF RE in connection with Cromwell’s offer to Cromwell based in part on information provided by CPF acquire all of the CPF Units on issue that it does not already RE to Cromwell. Cromwell has compiled the Forecast own, thus merging CPF into CDPT. In this document, this is Pro Forma Income Statement of Combined Cromwell for referred to as the Merger. FY13, which is included in Section 9 on page 49. Except to For the Merger to proceed, CPF Unitholders will need to the extent that CPF RE is responsible for the information approve the Resolutions at a general meeting. The Notice which it has provided to Cromwell for this purpose (and CPF of Meeting is in Annexure 5 on page 160. The Supplemental RE assumes responsibility for that information), Cromwell Deed which will give effect to the Merger by amending CPF’s takes responsibility for information concerning Cromwell constitution is in Annexure 7 on page 163. after implementation of the Merger and the Pro Forma Income Statement of Combined Cromwell for FY12 and Cromwell is offering Cromwell Securities to CPF Unitholders the Pro Forma Balance Sheet of Combined Cromwell as in return for their CPF Units. A Cromwell Security consists at 30 June 2012. of one CCL Share (issued by CCL) stapled to one CDPT Unit (issued by CDPT RE). This Explanatory Memorandum is JR Securities Limited (ABN 99 054 784 619) has prepared accordingly also a prospectus issued by CCL under Part 6D.2 the Investigating Accountant’s Report in relation to the of the Corporations Act in respect of the CCL Shares, and Merger contained in Annexure 1 on page 68 and takes a product disclosure statement issued by CDPT RE under responsibility for that report. CCL and CPSL and their Part 7.9 of the Corporations Act in respect of the CDPT Units. respective directors, officers, employees and their other advisers do not assume any responsibility for the accuracy General or completeness of the Investigating Accountant’s Report. You should read the entire Explanatory Memorandum before Deloitte Corporate Finance Pty Limited (ABN 19 003 833 deciding how to vote on the Resolutions to be considered at 127 AFSL 241457) has prepared the Independent Expert’s the Meeting and, if necessary, contact your financial, legal, Report in relation to the Merger contained in Annexure 3 on tax or other professional adviser. page 83 and takes responsibility for that report. CCL and CPSL and their respective directors, officers, employees and If you have any questions about the Merger please read advisers do not assume any responsibility for the accuracy Section 2 on page 9 and, if your question is not answered or completeness of the Independent Expert’s Report. there, call Cromwell Investor Services on 1300 276 693 or visit CPF’s website at www.cromwell.com.au/cpfmerger. Minter Ellison has prepared the Taxation Report on certain taxation implications of the Merger in Annexure 2 on page 77 CCL and CDPT RE may be contacted at GPO Box 1093, and takes responsibility for that report. CCL and CPSL and Brisbane QLD 4001, email: [email protected], their respective directors, officers, employees and their other telephone: 1300 276 693, fax: 07 3225 7788. advisers do not assume any responsibility for the accuracy or completeness of the Taxation Report. No investment advice This Explanatory Memorandum does not constitute financial Financial data product advice and has been prepared without reference to The Financial Information in this Explanatory Memorandum your investment objectives, financial situation, tax position or does not purport to comply with Article 11 of Regulation particular needs, or those of any other person. S-X of the rules and regulations of the US Securities and Neither this Explanatory Memorandum nor the Taxation Exchange Commission. Report in Annexure 2 on page 77 constitute tax advice.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 1 Regulatory information CPSL and their respective directors disclaim any obligation A copy of this Explanatory Memorandum was lodged with or undertaking to distribute after the date of this Explanatory ASIC on 31 August 2012. Neither ASIC nor any of its officers Memorandum any updates or revisions to any forward- takes any responsibility for the contents of this Explanatory looking statements to reflect any change in expectations or Memorandum. any change in events, conditions or circumstances on which any such statement is based. Forward-looking statements An investment in CPF is subject to investment and other Certain statements in this Explanatory Memorandum risks, including possible delays in repayment and loss relate to the future. The forward-looking statements in of income and capital invested. CPSL does not give any this Explanatory Memorandum are not based on historical guarantee or assurance as to the performance of CPF facts, but reflect the current expectations of CPSL or, in or the repayment of capital. Investments in CPF are not relation to the Cromwell Information, Cromwell. These investments in, or deposits or other liabilities of, CPSL. statements generally may be identified by the use of CPSL is not an authorised deposit-taking institution. forward-looking words or phrases such as ‘believe’, ‘aim’, An investment in Cromwell is subject to investment and ‘expect’, ‘anticipated’, ‘intending’, ‘foreseeing’, ‘likely’, other risks, including loss of capital invested. None of ‘should’, ‘planned’, ‘may’, ‘estimate’, ‘potential’, and other CCL, CPSL, CDPT or any other members of the Cromwell similar words and phrases. Statements that describe CPF’s Property Group gives any guarantee or assurance as to the or Cromwell’s objectives, plans, goals or expectations are or performance of Cromwell. may be forward-looking statements. These forward-looking statements involve known and Notice to persons outside Australia unknown risks, uncertainties, assumptions and other (except New Zealand) important factors that could cause the actual results, The Merger relates to the securities of Australian entities. performance or achievements of CPF or Cromwell to be This Explanatory Memorandum complies with the disclosure materially different from future results, performance or requirements of Australia, which may be different from achievements expressed or implied by such statements. the requirements applicable in other jurisdictions. The forward-looking statements are based on numerous The financial information included in this document is either assumptions regarding present and future operating based on financial statements that have been prepared strategies and the environment in which CPF and Cromwell in accordance with Australian Accounting Standards will operate in future. The risks described in Section 10 on or in the case of proportionately consolidated financial page 56 could affect future results of CPF or Cromwell, information, policies adopted by Cromwell, both of which causing these results to differ materially from those may differ from generally accepted accounting principles expressed, implied or projected in any forward-looking in other jurisdictions. statements. These factors are not a complete list of all of the important factors that could cause actual results If you are a Foreign Investor you will not be able to receive to differ materially from those expressed in any forward- Cromwell Securities under the Merger. Foreign Investors looking statement. Other unknown factors could also have a should refer to Section 4.4 on page 24. material adverse effect on future results of CPF or Cromwell. This Explanatory Memorandum does not constitute an offer Forward-looking statements should, therefore, be construed to sell, or the solicitation of an offer to buy, any securities in light of these risks and undue reliance should not be in the United States or to any ‘US person’ (as defined placed on forward-looking statements. in Regulation S under the US Securities Act of 1933, as The historical financial performance of CPF and Cromwell is amended (Securities Act) (US Person). no assurance or indicator of the future financial performance Cromwell Securities have not been, and will not be, of CPF and/or Cromwell (whether or not the Merger is registered under the Securities Act or the securities laws implemented). Neither CPSL nor Cromwell guarantees of any state or other jurisdiction of the United States, and any particular rate of return or the performance of CPF or may not be offered or sold in the United States or to any Cromwell, or the repayment of capital from CPF or Cromwell US Person without being so registered or pursuant to or any particular tax treatment. an exemption from registration. All subsequent written and oral forward-looking statements attributable to CPF RE or Cromwell or any person acting Notice to persons in New Zealand on their behalf are qualified by this cautionary statement. The potential issue of Cromwell Securities to Merger Other than to the extent required by law, neither CCL nor Participants in New Zealand is a regulated offer made CPSL, and none of their directors or any other person gives under Australian and New Zealand law. In Australia, this any representation, assurance, warranty (whether express is Chapter 8 of the Corporations Act 2001 and Regulations. or implied) or guarantee that the accuracy, likelihood or In New Zealand, this is Part 5 of the Securities Act 1978 and occurrence of the events or results expressed or implied the Securities (Mutual Recognition of Securities Offerings – in any forward-looking statements in this Explanatory Australia) Regulations 2008. Memorandum will actually occur. The Merger and the content of this Explanatory The forward-looking statements in this Explanatory Memorandum are principally governed by Australian rather Memorandum reflect views held only at the date of this than New Zealand law. In the main, the Corporations Act Explanatory Memorandum. Subject to any continuing 2001 and Regulations (Australia) set out how the offer obligations under the Corporations Act, and except as of Cromwell Securities must be made. otherwise set out in this Explanatory Memorandum, CCL,
2 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting There are differences in how securities are regulated The personal information is collected and shared for under Australian law. For example, the disclosure of fees the primary purpose of assisting CPF RE to conduct the for collective investment schemes is different under the Meeting and Cromwell to implement the Merger should Australian regime. the Resolutions be approved at the Meeting. The personal The rights, remedies, and compensation arrangements information may be disclosed to the respective unit and available to New Zealand investors in Australian securities security registries of CPF and Cromwell, related bodies may differ from the rights, remedies, and compensation corporate of CPF and Cromwell, third party service providers arrangements for New Zealand securities. The dispute (including print and mail service providers), authorised resolution process described in this Explanatory securities brokers and professional advisers and to the ASX Memorandum is only available in Australia and is not and other Regulatory Authorities, and where disclosure available in New Zealand. is required or allowed by law or where the individual has consented. Personal information may also be used to call Both the Australian and New Zealand securities regulators CPF Unitholders in relation to the Meeting. CPF Unitholders have enforcement responsibilities in relation to the Merger. who appoint an individual as their proxy, corporate If you are a CPF Unitholder with a registered address in New representative or nominee to vote at the Meeting should Zealand and you need to make a complaint about the offer of ensure that they inform such an individual of the matters Cromwell Securities pursuant to the Merger, please contact outlined above. the Financial Markets Authority, Wellington, New Zealand. The Australian and New Zealand regulators will work Up-to-date information together to settle your complaint. CPF RE will issue or procure the issue of a supplementary The taxation treatment of Australian securities is not the document to this Explanatory Memorandum if it or Cromwell same as for New Zealand securities. becomes aware of any of the following between the date of If you are uncertain about whether the Merger is appropriate this Explanatory Memorandum and the Record Date: for you, you should seek the advice of an appropriately • a material statement in this Explanatory Memorandum qualified financial adviser. is misleading or deceptive; The implementation of the Merger may involve a currency • a material omission from this Explanatory exchange risk for CPF Unitholders from New Zealand. Memorandum; The currency for the Cromwell Securities is not New Zealand • a material change affecting a matter that is referred to dollars. The value of the Cromwell Securities will go up or in this Explanatory Memorandum; or down according to changes in the exchange rate between Australian dollars and New Zealand dollars. These changes • a significant new matter has arisen and it would may be significant. have been required to be included in this Explanatory Memorandum if known at the date of this Explanatory If you expect the Cromwell Securities to pay any amounts Memorandum. in a currency that is not New Zealand dollars, you may However, if the change will not be materially adverse, incur significant fees in having the funds credited to a bank a supplementary document may not be issued. Updated account in New Zealand in New Zealand dollars. information that is not materially adverse will be available The Cromwell Securities are able to be traded on the ASX. free of charge at www.cromwell.com.au/cpfmerger or If you wish to trade the Cromwell Securities through that by calling 1300 276 693 until the Implementation Date. market, you will have to make arrangements for a participant Information contained in the Cromwell Information (and in that market to sell the Cromwell Securities on your behalf. any supplementary prospectus and product disclosure As the ASX does not operate in New Zealand, the way in statement) may change from time-to-time. If the change which the market operates, the regulation of participants will be materially adverse then, in accordance with the in that market, and the information available to you about Corporations Act, a supplementary prospectus and product Cromwell Securities and trading may differ from securities disclosure statement will be issued. However, if the change markets that operate in New Zealand. will not be materially adverse, a supplementary prospectus and product disclosure statement may not be issued. Privacy and personal information Updated information that is not materially adverse will be CPF RE and Cromwell and their respective registries will available from Cromwell’s website at www.cromwell.com.au/ need to collect and share personal information to implement aboutcromwell/newsroom and upon request a paper copy the Merger. The personal information may include the of any updated information will be provided free of charge names, dates of birth, addresses, other contact details, until the Implementation Date. bank account details and details of the holdings of CPF Unitholders, and the names of individuals appointed by Expiry date CPF Unitholders as proxies, corporate representatives or No Cromwell Securities will be issued under this Explanatory nominees at the Meeting. Memorandum later than 13 months after the date of The collection of some of this information is required or this Explanatory Memorandum. authorised by the Corporations Act. CPF Unitholders who are individuals and the other individuals in respect of whom personal information is collected as outlined above have certain rights to access and correct the personal information collected in relation to them, and can contact Cromwell Investor Services on 1300 276 693 if they wish to exercise those rights.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 3 INDEPENDENT CHAIRMAN’S LETTER
7 September 2012 Cromwell Securities are quoted and traded on the ASX. Dear CPF Unitholder Therefore, their price can and does change regularly. In the 3 months to 24 August 2012, the price of Cromwell Proposed Merger of CPF Securities on the ASX has ranged from approximately $0.675 to $0.750 and the VWAP has been $0.703. This is equivalent with Cromwell Property Group to between approximately $0.155 and $0.172 with a VWAP of This Explanatory Memorandum relates to your investment in $0.1616 per existing CPF Unit at the Merger Ratio. the Cromwell Property Fund and contains details of an offer What you will receive if the Merger is implemented is by Cromwell to acquire all of the CPF Units that it does not discussed in more detail in Section 4 on page 22. already own in return for the issue of Cromwell Securities to CPF Unitholders (other than Foreign Investors). The process Rationale for CPF Unitholders by which this will occur is referred to as the Merger. For more information see Section 4 on page 22. Following the onset of the financial crisis in 2008 and the resulting fall in property values, CPF RE has taken a number For the Merger to proceed, CPF Unitholders (other than of actions. This has included the sale of a number of assets Cromwell) will need to approve the Resolutions at the Meeting to stabilise the Fund and ensure CPF maintains the support and certain other conditions will need to be met. If the Merger of its lenders. Nonetheless, during this period, both the unit is implemented, CPF Unitholders will hold approximately 2.7% price and the Fund’s income and NTA per CPF Unit have of Cromwell Securities on issue and Cromwell will own 100% deteriorated significantly. of the CPF Properties and other assets held by each entity. Recent valuations of the CPF Properties have seen a further What CPF Unitholders will receive deterioration of values and, as a result, NTA per CPF Unit. This resulted in the LVR for the Bank Loan increasing to 67% If the Merger is implemented, CPF Unitholders (other and gearing in the Fund increasing to 79%. If the Merger is than Foreign Investors and Cromwell) will receive 0.2298 not implemented it is likely the Fund will need to sell one or Cromwell Securities for each CPF Unit held on the Record more assets or raise further capital in order to reduce the Date (the Merger Ratio). The Merger Ratio has been gearing of the Fund to a more sustainable long term level. determined having regard to the NTA per CPF Unit and to the NTA per Cromwell Security at 30 June 2012 (adjusted CPF has been closed to redemptions since January 2009. for Transaction Costs), being $0.6727 for each Cromwell Since that time CPF RE has not been able to provide an Security and $0.1546 for each CPF Unit. Both CPF RE and opportunity for CPF Unitholders to withdraw from the Cromwell consider that determining the Merger Ratio based Fund and many CPF Unitholders have expressed a desire on the respective NTAs of both a CPF Unit and a Cromwell to realise their holding in CPF. The Merger would enable Security is appropriate because it reflects the underlying CPF Unitholders who wish to realise their holding to do value of the property and other assets held by each entity. so by selling the Cromwell Securities they receive on the ASX. CPF Unitholders who elect to retain their Cromwell Set out below is a table showing key financial information Securities will have exposure to the larger, more diversified for CPF before the Merger and, assuming the Merger goes property portfolio of Cromwell, whilst retaining some ahead, for the Combined Cromwell: exposure to the CPF Properties. Key Statistics for CPF Unitholders CPF RE suspended the payment of distributions in July 2012 due largely to the failure of the major tenant at the Per 10,000 existing CPF Units CPF Combined Cromwell Smithfield Property. CPF RE has entered into a conditional (in current form) (effective) agreement with a tenant for part of the vacant space but, if Number of securities 10,000 2,298 finalised, this will result in CPF providing a rent-free period and completing property improvements to meet the tenant’s Forecast annualised requirements. The Fund is not expected to be in a position distribution for FY13 $0 $167 to recommence distributions until gearing is reduced, the majority of remaining vacancies are leased and the Independent Expert’s $0.1421 $0.1655 associated costs paid. estimated value of securities -$0.1619 -$0.1724
4 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell has forecast distributions of 7.25 cents per A number of steps have been taken by the directors to Cromwell Security for the 2013 Financial Year. For further address this conflict of interest and ensure that neither information see Section 9 on page 49. This is equivalent to group of investors is preferred over the other. Steps 1.67 cents per CPF Unit at the Merger Ratio. Cromwell pays taken include the appointment of the Independent Expert distributions quarterly in arrears, with the next distribution, to prepare a report for CPF Unitholders in relation to for the quarter ended 30 September 2012, expected to be the Merger. paid on or about 14 November 2012. CPF RE has considered a number of strategic alternatives Independent Expert’s opinion to the Merger. These have included an immediate sale The Independent Expert’s Report has been prepared by of some or all of the CPF Properties, a sale of the CPF Deloitte Corporate Finance Pty Limited. The Independent Properties over time, a stand alone the ASX listing of CPF, Expert has concluded that the Merger is fair and reasonable a recapitalisation of CPF and continuing the Fund with and, therefore, in the best interests of CPF Unitholders. the current portfolio and capital structure. Details of each A summary of the Independent Expert’s Report is in of these alternatives and the reason why CPF RE does Section 3 on page 13 and the full report is in Annexure 3 on not believe they are superior to the Merger are set out in page 83. You should read the Independent Expert’s Report Section 4.2 on page 23. in full. CPF RE has also considered why you might choose not to vote in favour of the Merger, see Section 4.11 on page 28. Foreign Investor Facility for ineligible Foreign Investors Risks you should consider The Merger will not be extended to CPF Unitholders whose One reason you may choose to not vote in favour of the registered address on the Record Date is outside Australia Merger is that you are not happy with the risks associated or New Zealand. The Cromwell Securities those Foreign with the Merger and the risks involved in holding Cromwell Investors would otherwise receive as Merger Consideration Securities. For example, if the Merger is approved and will be sold and the proceeds, net of costs, will be distributed implemented: to them. More detail is available in Section 4.4 on page 24. • as a Cromwell Securityholder, you would have exposure to the listed equities market; Voting and further information • your investment, being Cromwell Securities, would have The Resolutions enabling the Merger will be considered at a greater exposure to the commercial office sector; a meeting of CPF Unitholders to be held at 1pm, The River • Cromwell’s business is broader than property ownership. Room, Stamford Plaza, corner Edward & Margaret Streets, Therefore, an investment in Cromwell will be subject to Brisbane on Wednesday 3 October 2012. different risks than an investment in the CPF; If the Resolutions are approved by the requisite majorities • as a result of additional business activities, Cromwell’s at the Meeting and the Merger is implemented, CPF exposure to disputes and possible litigation is potentially Unitholders will participate regardless of whether or not they higher than CPF’s exposure; and voted or whether they voted against the Merger. Therefore • holding Cromwell Securities may have different taxation it is important that you read this Explanatory Memorandum implications for you than holding CPF Units. in full and have your say by voting on the Resolutions to be considered at the Meeting. Specific risks which relate to the Merger are set out in Section 5 on page 30. You can vote in person by attending the Meeting or by lodging a proxy prior to the Meeting. See Annexure 6 on page 161 for Independent Directors Recommendation further information. The Independent Directors have carefully considered If appropriate to your needs, you should also obtain the advantages and disadvantages of the Merger and independent financial or other professional advice before potential alternatives. The Independent Directors have making your decision about how to vote. If you have any concluded that the potential advantages of the Merger questions in relation to the Explanatory Memorandum, outweigh the potential disadvantages and are greater you can contact Cromwell Investor Services on 1300 276 693. than the potential advantages of the other alternatives. Therefore, the Independent Directors believe that accepting Yours faithfully the Merger is in the best interests of CPF Unitholders and they unanimously recommend that you vote in favour of the Merger, in the absence of a Superior Proposal. CPSL is the responsible entity of both CPF and CDPT and the directors of CPSL are also the directors of CCL. The directors of CPSL are required by law to act in Geoffrey Levy AO the best interests of both CPF Unitholders and Cromwell Chairman Securityholders and thus take a balanced view of the relative interests of CPF Unitholders and Cromwell Securityholders when evaluating the Merger. As a result, there is a conflict of interest which needs to be appropriately managed.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5 WHAT YOU SHOULD DO
Carefully read this Explanatory Memorandum and the Independent Expert’s Report You should read this Explanatory Memorandum (and the Independent Expert’s Report in Annexure 3 on page 83) in full before deciding how to vote. The Merger Overview in Section 2 on page 9 may help answer some of your questions. If you have any doubts about what action to take, you should seek your own independent financial, legal, tax or other professional advice before deciding how to vote at the Meeting.
Vote on the Merger If you are a CPF Unitholder on the CPF Register at 5pm on Monday 1 October 2012 you are entitled to vote on whether you want the Merger to proceed or not (unless you are subject to the voting exclusions listed in Section 8.3 on page 48). You can vote • by proxy, by completing and returning a Proxy Form; or
• in person, by attending the Meeting to be held at The River Room, Stamford Plaza, corner Edward & Margaret Streets, Brisbane on Wednesday 3 October 2012 commencing at 1pm
To ensure your Proxy Form is valid, you should return it so that it is received by 1pm on Monday 1 October 2012. Instructions for completing and returning your Proxy Form are in Annexure 6 on page 161.
6 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 1. Key Information
1.1. Merger Highlights For the Merger to be implemented all the Resolutions need to be passed at the Meeting and certain other conditions will need to be met. If the Merger is implemented, CPF Unitholders (other than Foreign Investors and Cromwell) will receive: • 0.2298 Cromwell Securities for each CPF Unit, calculated on an NTA for NTA basis (adjusted for Transaction Costs) as at 30 June 2012; and • forecast Cromwell distributions of 7.25 cents per Cromwell Security for FY13, paid quarterly (being equivalent to 1.67 cents per CPF Unit).
Cromwell Securities are listed and can either be sold on the ASX or retained. They provide exposure to: • an ASX listed REIT with a property management and funds management business; • greater price volatility than unlisted funds due to their listed nature; • a larger property portfolio with a greater geographic diversification, higher number of properties and tenants and a longer WALE but an increased exposure to the office sector; • the wider business activities of Cromwell including property and funds management and the potential for some development activity in the future; and • lower gearing of 54% compared to 79% for CPF. Other things to note about the Merger: • CPF Unitholders will have a much lower interest in the CPF Properties and will share any future returns from them with other Cromwell Securityholders. However, CPF Unitholders will gain exposure to the Cromwell Properties; • Cromwell will continue to manage the CPF Properties; and • CPF’s future if the Merger does not proceed is uncertain as CPF faces a number of challenges and is likely to need to sell further assets or potentially raise capital.
The Independent Expert has concluded Independent Expert’s opinion that the Merger is fair and reasonable and, therefore, in the best interests and the Independent Directors of CPF Unitholders. The Independent Directors recommendation recommend that you approve the Merger in the absence of a Superior Proposal. You should read this Explanatory Memorandum (and in particular the Independent Expert’s Report) in full before deciding how to vote.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 7 1.2. Key Terms
Term Meaning
Combined Cromwell In respect of references to Cromwell (or Cromwell Property Group) in this Explanatory Memorandum which relate to times or the state of affairs after implementation of the Merger, the economic entity resulting from the acquisition of CPF by Cromwell in accordance with the Merger being CCL, CDPT and CPF and each of their related bodies corporate and any entities controlled by them, unless the context otherwise requires. CPF or Fund Cromwell Property Fund ARSN 119 080 410. CPF Units Fully paid ordinary units issued in CPF. Cromwell or In respect of references to Cromwell (or Cromwell Property Group) in this Explanatory Memorandum which Cromwell Property Group relate to times or the state of affairs before implementation of the Merger, CCL and CDPT and each of their related bodies corporate and any entities controlled by them, unless the context otherwise requires. For ease of reference, certain references to Cromwell are in fact references to CDPT RE or CCL. Cromwell Securities Cromwell Units stapled to Cromwell Shares. This includes Cromwell Securities already on issue and also, where the context requires, Cromwell Securities to be issued to Merger Participants as Merger Consideration. Merger The arrangement under which Cromwell acquires all of CPF Units it does not already own in return for providing the Merger Consideration, which is facilitated by amendments to CPF Constitution as set out in the Supplemental Deed. Merger Consideration The Cromwell Securities issued by Cromwell in return for the transfer to Cromwell of all the CPF Units it does not already own pursuant to the Merger. The Cromwell Securities to be issued will be determined by reference to the Merger Ratio.
1.3. Key Dates
Event Date
Last date and time for receipt of Proxy Forms 1pm, Monday 1 October 2012 Date and time for determining eligibility of CPF Unitholders to vote at the Meeting 5pm, Monday 1 October 2012 Last day to transfer existing CPF Units Record date for determining entitlement to participate in Merger 5pm, Monday 1 October 2012 Meeting of CPF Unitholders 1pm, Wednesday 3 October 2012
If the Resolutions are properly passed, the following timetable is proposed for the implementation of the Merger.
Event Date1
Effective date Thursday 4 October 2012 Implementation date Thursday 4 October 2012 Issue date of Cromwell Securities to Merger Participants Thursday 4 October 2012 Record date for entitlement to September quarter distributions for Cromwell Securities Friday 5 October 2012 Trading of Cromwell Securities issued to Merger Participants expected to commence on the ASX Friday 5 October 2012 Latest date for despatch of holding statements for Cromwell Securities to Merger Participants Wednesday 10 October 2012 Expected payment of net sale proceeds to Foreign Investors under Foreign Investor Facility Friday 9 November 2012 Expected payment date for Cromwell September quarter distributions Wednesday 14 November 2012
1 All dates following the date of the Meeting are indicative only and are subject to satisfaction of the conditions precedent to the implementation of the Merger (see Section 4 on page 22). CPSL reserves the right to vary these dates without prior notice. Any changes to the above timetable will be announced through ASX and at www.cromwell.com.au/cpfmerger.
8 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 2. Merger Overview
Why have you received this Explanatory What will you receive under the Merger? Memorandum? Merger Participants will receive 0.2298 Cromwell Securities You have received this Explanatory Memorandum because in return for the transfer of each of their CPF Units to you are a CPF Unitholder. Unless you transfer your CPF Cromwell. Further information is set out in Section 4.4 on Units before the Record Date, you will be entitled to vote page 24. on the Resolutions at the Meeting. If the Resolutions are Cromwell Securities are listed on the ASX and are comprised approved at the Meeting, the Merger will be deemed to have of one CCL Share stapled to one CDPT Unit. been accepted by all CPF Unitholders and the Merger will be implemented. How was the Merger Ratio set? The Explanatory Memorandum gives you the information The Merger Ratio was set by arm’s length negotiation you need when making your decision about whether or between CPF RE and Cromwell. not to vote in favour of the Resolutions at the Meeting on The Merger Ratio of 0.2298 Cromwell Securities to 1 CPF 3 October 2012 at 1pm. For example, it gives you information Unit was calculated by dividing the NTA for 1 CPF Unit as about CPF’s current financial position and the CPF at 30 June 2012 by the NTA of one Cromwell Security as at Properties (see Section 6 on page 31) as well as information 30 June 2012, in both cases adjusted for Transaction Costs. about Cromwell and Cromwell Securities (see Section 7 Refer to Section 4.4 on page 24 for further detail. on page 39) since the Merger Consideration will involve the issue of Cromwell Securities. When will you receive your Merger You should carefully read this Explanatory Memorandum and, if necessary, consult your legal, tax, financial or other Consideration? independent professional adviser before voting on the If the Merger is implemented and the Merger becomes Resolutions. effective on the Effective Date, Merger Participants will be issued Cromwell Securities on or about the Implementation What is the Merger? Date. Further information is provided in Section 4.6 on page 25. The Merger involves the combining of CPF into Cromwell by way of the acquisition by Cromwell of all of the CPF Units on issue that it does not already own. Further information is Are there any conditions to the Merger? provided in Section 4 on page 22. The obligations of CPF RE and Cromwell to implement the Merger are conditional on the satisfaction or waiver of Why should CPF not continue to operate certain conditions. The conditions are included in the Merger Implementation Agreement and summarised in Section in its current form? 12.11 on page 61 with key conditions including: CPF has been, and continues to be, adversely affected by • the CPF Unitholder approvals at the Meeting; the impact of global financial events and the weak Australian property market. CPF remains highly geared and prospects • the Independent Expert not changing its conclusion for a substantial appreciation in property values in the near that the Merger is in the best interests of CPF term appear poor. CPF Unitholders do not currently have any Unitholders; and liquidity with regard to their investment and are experiencing • the Independent Directors continuing to recommend instability with regard to distributions. unanimously that Merger Participants vote in favour of For more detail refer to Section 4.1 on page 22. the Resolutions (in the absence of a Superior Proposal).
What alternatives to the Merger have the Independent Directors considered? CPF RE has considered a number of strategic alternatives for CPF including an immediate sale of some or all of the CPF Properties, a managed wind-up of the Fund over time, a stand alone listing of the Fund on the ASX, a recapitalisation of the Fund and continuing the Fund with the current properties and structure. However, other than the Merger, none of these alternatives are considered by the Independent Directors to be a preferred option for CPF Unitholders. Section 4.2 on page 23 sets out the strategic alternatives considered.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 9 What happens if the Merger is not approved What will happen to your distributions? or the other conditions are not satisfied? CPF ceased paying distributions to CPF Unitholders in If the Merger is not approved by CPF Unitholders, CPF RE July 2012 following the failure of the major tenant at the will need to determine the next best alternative for CPF Smithfield Property, the resulting loss of rent and the based on the circumstances prevailing at the time. CPF RE expected capital required to re-lease the vacancy and reduce cannot say with certainty what that alternative will be at this gearing. time. CPF faces a number of challenges on a standalone If the Merger is implemented, Merger Participants will be basis and CPF RE is likely to try to reduce the Fund’s gearing entitled to the distribution Cromwell pays its securityholders through the sale of one or more CPF Properties or the issue in relation to the September quarter, provided they continue of further CPF Units. to hold their Cromwell Securities until the record date for If the other conditions are not satisfied, CPF RE will either that distribution. determine the next best alternative for CPF at that time Cromwell has forecast to pay distributions of 7.25 cents or may adjourn the Meeting until the relevant issues can per Cromwell Security in relation to FY13, equivalent to be addressed (if possible). If the Meeting is adjourned, 1.67 cents per CPF Unit. Cromwell pays distributions each further documentation may need to be provided to CPF quarter, with the amount and timing of each quarter’s Unitholders and/or different resolutions may need to be put distribution being announced on the ASX towards the end to the Meeting. of each quarter. There will also be some timing differences For further details, refer to Section 4.7 on page 26. as a result of the longer period between declaration and payment of distributions. What happens if the Merger is implemented? The forecast FY13 distributions for Cromwell Securities and If the Resolutions are approved at the Meeting and the relevant key dates are: conditions described above are satisfied or waived, CPF RE Quarter Expected Expected Amount Effective and Cromwell will take the necessary steps to implement the ending Record Payment (cents per Amount Merger. Essentially, this will involve CPF Units not already Date Date Cromwell (cents per held by Cromwell being transferred to Cromwell and Merger Security) CPF Unit)* Participants being issued with Cromwell Securities in return. Foreign Investors will participate in the Foreign Investor Facility. Sep 2012 5 Oct 2012 14 Nov 2012 1.8125 0.4165 Further details are provided in Section 4.6 on page 25. Dec 2012 31 Dec 2012 13 Feb 2013 1.8125 0.4165 What if you are a Foreign Investor? Mar 2013 29 Mar 2013 15 May 2013 1.8125 0.4165 If the Merger is implemented, Foreign Investors will not be Jun 2013 28 Jun 2013 14 Aug 2013 1.8125 0.4165 issued Cromwell Securities in exchange for their CPF Units. Instead, Foreign Investors will participate in the Foreign * The Effective Amount per CPF Unit is determined by multiplying the Amount per Cromwell Security by the Merger Ratio. Investor Facility, under which the Cromwell Securities that would otherwise have been issued to them will be issued to the Foreign Investor Facility Nominee who will sell those Refer to Section 4 on page 22 for further information. Cromwell Securities on behalf of the Foreign Investors on market through the ASX and pay the net sales proceeds to What are the tax implications of the Merger? the Foreign Investors. Minter Ellison have provided a Taxation Report on the Further information is available in Section 4 on page 22. general Australian taxation impacts of the Merger on Merger Participants. This report is set out in Annexure 2 on page 77. You should obtain advice from your own independent professional tax adviser on the tax implications for you of the Merger.
10 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Why might you vote for the Merger? What are the conclusions of the Independent The reasons you might vote for the Merger are: Expert and why have they reached those • the value of the Merger Consideration is attractive conclusions? compared to alternatives (refer to Section 4.2 on page The Independent Expert has considered the Merger and 23; has concluded that the Merger is fair and reasonable and • introduction of liquidity through the ability to sell therefore, in the best interests of CPF Unitholders. Cromwell Securities on the ASX (however, as to the The Independent Expert commented that: extent of the liquidity, see Section 4.11.1 on page 28 and Section 8.2.2 of the Independent Expert’s Report); • the fair market value of the consideration offered by Cromwell of $0.1655 to $0.1724 is above • continued distributions, albeit at a lower rate than the Independent Expert’s estimate of the fair market previously paid by CPF; value of a CPF Unit of $0.1421 to $0.1619; and • broader property portfolio diversification; • the strategic alternatives considered are not superior to • reduced risk through lower gearing and greater the Merger because they will result in significant dilution diversification of debt sources; in the NTA per CPF Unit and/or have long lead times and • potential for reduced costs of debt; significant execution risks; and • continuity of management; and • the advantages of the Merger outweigh the • growth potential in operating businesses. disadvantages. Further information is available in Section 4.10 on page 27. The Independent Expert’s Report is summarised in Section 3 on page 13 and set out in Annexure 3 on page 83. You should Why might you vote against the Merger? read the Independent Expert’s Report in full before deciding how to vote. The reasons you might vote against the Merger are: • change in nature of investment from unlisted to listed; Do the Independent Directors recommend • Cromwell pays distributions quarterly, but CPF would the Merger? pay distributions monthly (if distributions were re The Independent Directors unanimously recommend that commenenced); you vote in favour of the Merger, in the absence of a Superior • potential variability in the implied value of the Merger Proposal. Consideration; The reasons for the Independent Directors’ unanimous • broader business and resulting change in risk profile; recommendation are set out in detail in Section 4.9 on • if asset values improve, CPF may generate better page 27. returns on a standalone basis; • reduction in effective Operating Earnings per CPF Unit; What is Cromwell’s rationale for the Merger? • no ability to undertake an alternative proposal; and The Merger is expected to deliver both qualitative and quantitative benefits to Cromwell. These include: • loss of control over CPF and the CPF Properties. Further information is available in Section 4.11 on page 28. • expected increases to the contribution of recurring income with the addition of CPF Properties to its What are the key risks associated property portfolio; • Cromwell expects to achieve savings in transaction costs with the Merger? via the Merger rather than acquiring CPF Properties If the Merger is implemented, Merger Participants will directly; cease to hold CPF Units and will instead hold Cromwell • Cromwell will realise its loans to CPF and receive Securities. In this case, the nature of the investment held an increased return on this capital; by Merger Participants will be different. CPF Units are units in an unlisted managed investment scheme which provide • the Merger is forecast to result in a slight increase exposure to property investment through the CPF Properties. in Cromwell’s Operating Earnings from 7.5 to 7.6 per Cromwell Securities are listed securities which give holders Cromwell Security in FY13, although gearing will exposure predominantly to property investments but also, to also increase slightly from approximately 53% to a lesser extent, to an operating business which undertakes approximately 54%; property management, funds management and property • the CPF Properties will provide further diversification development activities. by market sector, tenant and geographic location; The price at which Cromwell Securities can be sold on • Cromwell expects to achieve some operational the ASX is determined by market conditions and, as such, synergies, albeit with some loss of fee income; and is expected to be more volatile than unit prices of unlisted • Cromwell expects to benefit from being seen to provide funds and may not necessarily reflect the NTA per Cromwell a solution for what has been Cromwell’s poorest Security at the relevant time. performing managed fund. Further detail is provided in Section 5 on page 30 and For further details, refer to Section 4.8 on page 26. Section 10 on page 56.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 11 What happens if an alternative proposal Who is entitled to attend and vote emerges? at the Meeting? If an alternative proposal emerges before the Meeting All CPF Unitholders on the Record Date (other than the Independent Directors will review the proposal to Cromwell) will be entitled to attend and vote at the Meeting. determine if it represents a Superior Proposal and advise If you cannot or do not wish to attend the Meeting in person, CPF Unitholders of their recommendation. The Meeting you can vote by validly appointing a proxy or body corporate may need to be adjourned and, if so, the Implementation representative by the required time and directing them how Date would also change. Further information is available you wish to vote. in Section 4 on page 22. Voting will occur by way of a poll, which means each CPF Unitholder present in person or by proxy or by attorney or How has the conflict of interest been appointed representative, has one vote for each dollar value managed? of the total interest they have in CPF. CPSL is the responsible entity of both CPF and the CDPT Details on who may vote at the Meeting are set out in and so faces a conflict of interest when evaluating the Annexure 6 on page 161 and Section 8 on page 48. Merger on behalf of both Cromwell Securityholders and CPF Unitholders. Who is excluded from voting? To address the conflict of interest, separate management Although Cromwell will be a CPF Unitholder on the Record teams have evaluated and negotiated the Merger on behalf of Date, it will not vote on the Resolutions given its inherent Cromwell Securityholders and on behalf of CPF Unitholders interest in the outcome of the vote and the extent of its voting and made separate recommendations to the Cromwell power. Directors. The Independent Directors have also separately Further detail is provided in Section 8 on page 48. considered the Merger on behalf of CPF Unitholders and had regard to the Independent Expert’s Report. How do you vote? Further detail is provided in Section 6.6 on page 37. Details on how to vote are set out in Annexure 6 on page 161. Why is there a Meeting? Is voting compulsory, and what happens The nature of the Merger requires CPF Unitholders to if you do not vote? approve the Resolutions by the requisite majorities. Voting is not compulsory, but if the Merger is approved The CPF RE has convened the Meeting to allow CPF the Merger will be binding upon you even if you did not vote Unitholders to consider the Resolutions. The Resolutions are: or voted against the Merger. CPF RE therefore strongly • to approve the Merger and the acquisition by Cromwell encourages you to consider this Explanatory Memorandum of all of the CPF Units that it does not already own; and carefully and exercise your right to vote on the Resolutions. • to amend the CPF Constitution to facilitate Further details on voting are provided in Annexure 6 on the implementation of the Merger. page 161. The following requisite majorities are required to approve the Resolutions: Who can you contact if you have • Resolution 1 (approving the Merger): more than any other questions? 50 per cent of the total number of votes cast by CPF You can call the Cromwell Investor Services line on Unitholders who are entitled to vote; and 1300 276 693 or visit CPF’s website at • Resolution 2 (the constitutional amendment): at least www.cromwell.com.au/cpfmerger. 75 per cent of the total number of votes cast by CPF If you have a financial advisor, you should also consult them. Unitholders who are entitled to vote. Further detail is provided in Section 14 on page 67. The Resolutions are interconditional which means that the Merger will proceed only if both are approved. The Resolutions are set out in the Notice of Meeting in Annexure 5 on page 160.
Where and when will the Meeting be held? The Meeting will be held on Wednesday 3 October 2012 at The River Room, Stamford Plaza, corner Edward & Margaret Streets, Brisbane commencing at 1pm. The Notice of Meeting is in Annexure 5 on page 160.
12 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 3. Summary of Independent Expert’s Report
• The complete Independent Expert’s Report is provided in Annexure 3 on page 83
• The Deloitte Financial Services Guide is also contained in Annexure 3 on page 85
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 13
Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127 AFSL 241457
Riverside Centre Level 25 Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia
Tel: +61 (0) 7 3308 7000 Fax: +61 (0) 7 3308 7001 www.deloitte.com.au
The Directors Cromwell Property Securities Limited as responsible entity for Cromwell Property Fund Level 19 200 Mary Street Brisbane QLD 4000
31 August 2012
Dear Directors
Independent expert’s report Introduction Cromwell Property Fund (CPF or the Fund) is an open-ended unlisted diversified property fund holding a portfolio of direct property investments. Cromwell Property Group (Cromwell) owns approximately 17.6% of the units in CPF. Cromwell Property Securities Limited (CPSL), a wholly owned subsidiary of Cromwell, is the responsible entity for the Fund (CPF RE). On 8 August 2012, Cromwell announced it is in negotiations for the potential acquisition of all the units in CPF that it does not already own. Following this, Cromwell negotiated a formal proposal under which it would acquire all of the outstanding CPF units, which Cromwell does not currently own (the Proposed Transaction). A holder of CPF units (CPF Unitholders) will be issued Cromwell stapled securities consisting of one Cromwell Corporation Limited (CCL) share and one Cromwell Diversified Property Trust (CDPT) unit (together, Cromwell Securities), with a full entitlement to the Cromwell September 2012 quarter distribution, as full and final consideration for their units. The consideration is to be based on a ratio of 0.2298 Cromwell Securities for 1 CPF unit, which has been determined based on the relative net tangible assets (NTA) per security of Cromwell and CPF on 30 June 2012 according to their respective audited accounts, adjusted for expected transaction costs of both parties, being 67.27 cents and 15.46 cents, respectively. The Proposed Transaction is to be effected by a trust scheme to be facilitated by way of amendments to the CPF constitution, with those amendments being the subject of a special resolution by CPF Unitholders in a general meeting. Purpose of the report Whilst an independent expert’s report in respect of the Proposed Transaction is not required to meet any statutory obligations, the independent directors of CPF RE (the CPF Directors) have requested that Deloitte Corporate Finance Pty Limited (Deloitte Corporate Finance) provide an independent expert’s report advising whether, in our opinion, the Proposed Transaction is fair and reasonable, and therefore in the best interests of CPF Unitholders. We understand that this independent expert’s report is to be provided to CPF Unitholders in order to assist in their assessment of the Proposed Transaction and will be included in the explanatory memorandum (Explanatory Memorandum) being provided to CPF Unitholders. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the CPF Unitholders and CPF, in respect of this report, including any errors or omissions however caused.
Member of Deloitte Touche Tohmatsu Limited
14 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
Basis of evaluation In evaluating the Proposed Transaction we have considered ASIC Regulatory Guide 111: Content of expert reports, issued by ASIC in March 2011 (ASIC Regulatory Guide 111). In order to assess whether the Proposed Transaction is fair and reasonable we have: assessed whether the Proposed Transaction is fair by estimating the fair market value of a CPF unit on a control basis and comparing that value to the estimated fair market value of the consideration to be received by CPF Unitholders pursuant to the Proposed Transaction assessed the reasonableness of the Proposed Transaction by considering other advantages and disadvantages of the Proposed Transaction to CPF Unitholders. ASIC Regulatory Guide 111 refers to a ‘control transaction’ as being the acquisition (or increase) of a controlling stake in an entity that could be achieved, for example, by way of a takeover offer, scheme of arrangement, approval of an issue of shares using item 7 of section 611 of the Corporations Act 2001 (Cth), a selective capital reduction or selective buy back under Chapter 2J. In respect of control transactions, under ASIC Regulatory Guide 111 an offer is: fair, when the value of the consideration is equal to or greater than the value of the securities subject to the offer. The comparison must be made assuming 100% ownership of the target entity (i.e. including a control premium) reasonable, if it is fair, or, despite not being fair, after considering other significant factors, securityholders should accept the offer, in the absence of any higher bids before the close of the offer. To assess whether the Proposed Transaction is fair and reasonable to CPF Unitholders, we have adopted the tests of whether the Proposed Transaction is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in ASIC Regulatory Guide 111. According to ASIC Regulatory Guide 111, if an expert were to conclude that a proposal was ‘fair and reasonable’, it will also be able to conclude that the proposal is in the best interests of the members of the entity. If an expert were to conclude that the proposal was ‘not fair but reasonable’, it is open to the expert to conclude whether the proposal is in the best interests of the members of the entity. If the expert concludes that the proposal is neither fair nor reasonable then the expert would conclude that the proposal is not in the best interests of members of the entity. Summary and conclusion In our opinion the Proposed Transaction is fair and reasonable and therefore in the best interests of CPF Unitholders. In arriving at this opinion, we have had regard to the following factors: The Proposed Transaction is fair According to ASIC Regulatory Guide 111, in order to assess whether the Proposed Transaction is fair, the independent expert is required to compare the fair market value of a unit in CPF on a control basis with the fair market value of the consideration under the Proposed Transaction. The Proposed Transaction is fair if the value of the consideration is equal to or greater than the value of the securities subject to the offer. Set out in the table below is a comparison of our assessment of the fair market value of a CPF unit with the consideration offered by Cromwell under the Proposed Transaction.
Table 1: Evaluation of fairness
Low High Cents per security Cents per security
Estimated fair market value of a CPF unit on a control basis (Section 7.2.2) 14.21 16.19 Estimated fair market value of consideration offered (Section 8.2) 16.55 17.24
Source: Deloitte Corporate Finance analysis Note: 1. All amounts in this report are expressed in Australian dollars ($) unless otherwise stated and may be subject to rounding The fair market value of the consideration offered by Cromwell is above our estimate of the fair market value of a CPF unit. Accordingly it is our opinion that the Proposed Transaction is fair.
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 2
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 15
Valuation of a CPF unit CPF currently faces a number of challenges including a high level of gearing (which is required to be reduced by 30 June 2013) and suspension of distributions and unit redemptions. Therefore, CPF is required to implement strategies to improve its financial position. According to ASIC Regulatory Guide 111 (paragraph 15), the fair market value of the target securities should be determined on the basis of a knowledgeable and willing, but not anxious, seller that is able to consider alternative options to the proposed transaction (for example an orderly realisation of the target’s assets). Having regard to ASIC Regulatory Guide 111, we have used the net assets on a going concern basis methodology to estimate the fair market value of a unit in CPF on a control basis which estimates the fair market value of CPF by aggregating the fair market value of its assets and liabilities. The most significant factor impacting our estimate of the fair market value of a CPF unit is the underlying values of the properties held by CPF (the Properties). Due to the sensitivity of our valuation of a CPF unit to the valuation of the Properties, we have also considered market evidence derived from our analysis of asset-based multiples (tangible assets/earnings before interest and tax (EBIT)) observed in listed securities involving entities comparable to CPF to provide additional evidence of the fair market value of a unit in CPF. Due to the financial difficulties faced by CPF and other entities operating within the A-REIT sector, and having regard to our interpretation of ASIC Regulatory Guide 111, we do not consider more traditional cross-check methodologies such as implied earnings multiples based on enterprise value/EBIT, distribution yields or price/adjusted funds from operations provide meaningful benchmarks to cross-check our valuation of CPF. Our assessment of the fair market value of CPF’s net assets is based on the audited balance sheet as at 30 June 2012, adjusted to reflect the current fair market values of CPF’s assets and liabilities. The fair market value of the Properties is based on detailed valuations for each of CPF’s five properties which were prepared as at 30 June 2012. Of these, three were prepared by independent appraisers and the remaining two were management valuations adopted by the CPF Directors. All of the Properties have been independently valued between December 2011 and June 2012. The property valuations as at 30 June 2012 reflect a weighted average valuation capitalisation rate1 (WACR) of 9.72% (including the Edinburgh Park property) and 9.88% (excluding the Edinburgh Park property). This is an increase in the capitalisation rate of approximately 0.50% compared to the valuations as at 30 June 2011. We have reviewed the valuations of the Properties prepared as at 30 June 2012 and nothing has come to our attention that would cause us to make any adjustments for any valuation movements since 30 June 2012. Whether these valuations fall or rise in the future will be a major driver of the fair market value of a CPF unit. Given the high level of debt within the Fund, our valuation is sensitive to relatively small movements in the underlying value of the Properties. Our estimate of the impact of movements in the underlying valuations of the Properties on the fair market value of a CPF unit is set out below.
Figure 1: Valuation of a unit in CPF – sensitivity to movements in underlying real property values
50.00
Change in value of a CPF unit given a 40.00 50 basis point change in capitalisation rate on the valuation of the Properties 41.42
33.65
30.00
26.78 Assessed fair market value (mid-point)
20.00 20.67
15.20
10.27 Estimated fair marketvalue (cents per unit) 10.00
5.81
1.74 - (17%) (1.97) (14%) (9%) (5%) 0% 6% 12% 19% 26%
(10.00)
Percentage change in the value of the Properties as at 30 June 2012
Source: Deloitte Corporate Finance analysis
1 A capitalisation rate is the rate of return on a real estate investment property based on the expected income that the property will generate. Capitalisation rates are commonly calculated by dividing a property’s net income (fully leased) by the value of the property or transaction sale price achieved
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 3
16 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
Broadly speaking, a +/- 0.5% movement in the underlying capitalisation rate of the Properties (assuming no movement in the value of the Edinburgh Park industrial land held by CPF which has not been valued utilising a capitalisation approach) would have a (5.0%)/+5.5% impact on the value of the Properties which equates to an impact of approximately (32%)/+36% on the value of a CPF unit, after taking into account the impact of the existing leverage of the Fund. We note that a 0.5% downward movement in the underlying capitalisation rate of the Properties (with no corresponding change in the value of Cromwell Securities) would result in our assessment of the Proposed Transaction being not fair to CPF Unitholders. Valuation of consideration In order to estimate the fair market value of the consideration to be received by CPF Unitholders, we have relied upon an analysis of recent trading prices for Cromwell Securities (refer to Section 0). We have valued the consideration offered to CPF Unitholders under the Proposed Transaction at between 16.55 and 17.24 cents per CPF unit, which is set out in the table below.
Table 2: Valuation of consideration offered per CPF unit
Value of consideration Low High Cents per security Cents per security
Value of a Cromwell Security 72.00 75.00
Consideration ratio 0.2298 0.2298
Consideration per CPF unit 16.55 17.24
Source: Deloitte Corporate Finance analysis We consider that the value of a Cromwell Security includes the value attributable to the quarterly distribution to be paid by Cromwell in September 2012. Regardless of the outcome of the Proposed Transaction, the price of a Cromwell Security will vary in the future, based on market movements including securityholders’ perception of industry trends, changes in the value of the underlying assets of Cromwell and changes in Cromwell’s specific circumstances. If the implementation date of the Proposed Transaction is after the record date for the Cromwell September 2012 quarter distribution, CPF Unitholders will be entitled to, and be paid, the Cromwell September 2012 quarter distribution, in addition to the Cromwell Securities received in exchange for their CPF units. The valuation of a Cromwell Security has been assessed on a minority interest basis because, if the Proposed Transaction is approved, CPF Unitholders will hold a portfolio interest and therefore will become minority securityholders in the Cromwell. The Proposed Transaction is reasonable In accordance with ASIC Regulatory Guide 111 an offer is reasonable if it is fair. On this basis, in our opinion the Proposed Transaction is reasonable. We have also considered the following factors in assessing the reasonableness of the Proposed Transaction: Advantages of the Proposed Transaction The likely advantages to CPF Unitholders if the Proposed Transaction is approved include:
No superior alternatives to the Proposed Transaction If the Proposed Transaction does not proceed, CPF will continue to face a number of challenges including: there is minimal head room between the Fund’s current bank loan (Bank Loan) to value ratio (LVR) of approximately 67% and its bank covenant limit of 70%. In June 2012, the CPF RE negotiated a temporary increase in the LVR limit under the Bank Loan from 65% to 70% for the period 30 June 2012 to 30 June 2013. The negotiations did not result in any other material or unusual obligations being imposed on CPF. If the LVR is not reduced to 65% or lower by 30 June 2013, the Fund will be in breach of its Bank Loan subject to any further negotiations between the CPF RE and its lender. Therefore, it is likely that the Fund will be required to take action
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 17
to reduce its LVR to 65% or lower by 30 June 2013 and this would likely require the sale of one or more properties or additional equity injections from existing or new investors distributions are currently suspended and are not likely to recommence until the Fund’s LVR is reduced to an acceptable level and the majority of the current vacancy at the Smithfield property is leased redemptions have been suspended since January 2009, and are unlikely to recommence without significant asset sales being undertaken, or a recapitalisation of the Fund being completed. CPF will continue to seek to address these challenges if the Proposed Transaction does not proceed, however CPF has previously considered the following strategic alternatives to the Fund (refer to section 4.2 of the Explanatory Memorandum) and none of them are considered to provide a superior outcome for CPF Unitholders: immediate asset sales; given the current market environment it is likely to take some time to sell the Properties and there is uncertainty as to the price which could be achieved for these sales, in particular, CPF may be viewed as a forced seller which could adversely impact the net proceeds received. Both the Hurstville property and the Smithfield property were taken to market in early 2012, with neither property attracting a formal offer. Furthermore, the sale of the Properties would incur additional transaction costs (in comparison to the estimated costs payable by CPF in relation to the Proposed Transaction of $397,000) associated with agents’ fees, marketing and legal costs. CPF estimates these costs to be equivalent to 1.5% of the current value of the Properties, or approximately $2.5 million, which would reduce the net proceeds available to CPF Unitholders by approximately 1.5 cents per CPF unit if all the Properties were sold at prices equivalent to their current valuations. In the event that a number of the Properties were sold, this may not result in liquidity for CPF Unitholders as gearing levels would need to be reduced significantly prior to any redemption offer being made. In order to reduce gearing (total debt to total assets) to 55%, approximately $90 million of assets sales would need to occur, which represents approximately 55% of the value of the Properties as at 30 June 2012 managed wind-up; which may involve a lengthy process dependent upon the timing of the sale of the Properties, before receiving the net proceeds from a wind-up, and the quantum of proceeds to be realised is not certain as there is no guarantee that the Properties could be sold at or above current valuations. If the Properties were sold at less than current valuations to expedite a sale, this would result in a reduction in the NTA value of the Fund recapitalisation through a capital raising; in order to generate sufficient support, a significant discount to NTA is likely to be required thus diluting existing CPF Unitholders that do not participate. To reduce gearing (total debt to total assets) to 55%, an equity injection in the region of $40 million would be required. This represents approximately 155% of CPF’s net assets as at 30 June 2012. For a potential capital raising to provide liquidity to the Fund in addition to reducing gearing, an even greater amount would be required to be raised standalone listing; given the current financial position of the Fund including its high gearing levels and suspension of distributions, portfolio size, composition and quality, it is likely that CPF would trade at a substantial discount to its NTA. Currently non-stapled Australian Real Estate Investment Trusts (A-REITs) listed on the Australian Securities Exchange (ASX), on average, trade at a discount to NTA of 30%2 with smaller and highly geared A-REITs trading at greater discounts. Based on the foregoing, the strategic alternatives set out above will result in significant dilution in the NTA value per unit of the Fund and/or have long lead times and significant execution risks, and therefore do not provide a superior alternative to the Proposed Transaction. The Proposed Transaction provides improved liquidity for CPF Unitholders The consideration offered pursuant to the Proposed Transaction comprises Cromwell Securities, which are listed on the ASX thereby providing access to liquidity. CPF has not issued or redeemed units since January 2009, and therefore CPF Unitholders have been unable to realise their investment in CPF. Whilst unit transfers may occur between CPF Unitholders, these are negotiated and arranged independently of CPF. Under the current structure, and in the absence of further asset sales discussed below, CPF would need to undertake a large scale capital raising to provide liquidity for those CPF Unitholders wanting to realise their investment. CPF exceeded its LVR covenant in June 2012, however was able to renegotiate a temporary increase for a 12 month period, leaving equity issuance as the most viable option for raising cash. A large scale equity issuance would have the effect of diluting holdings of existing CPF Unitholders that do not participate.
2 Capital IQ as at 24 August 2012
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 5
18 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
The Proposed Transaction enables CPF Unitholders to realise NTA for their CPF units The merger ratio has been determined with reference to the relative NTA of Cromwell and CPF. The mid-point of the consideration offered implies a premium to CPF’s 30 June 2012 NTA of approximately 9% at a time when similar A-REITs are transacting at significant discounts to NTA. Given the current market conditions and trends in the A-REIT sector, investors in A-REITs (particularly highly leveraged vehicles) would generally not expect to receive consideration equivalent to NTA. Mergers and acquisitions occurring in the A-REIT sector since August 2009 have been at an average discount of 24%3 to NTA and listed securities for non-stapled A-REITs are currently trading at an average discount to NTA of 30%2.
Enhanced growth prospects relative to CPF on a standalone basis Cromwell’s growth prospects (and potentially future appreciation in the value of a Cromwell Security) are expected to be underpinned by its relatively strong current financial position and leveraged exposure to the property cycle through an integrated property investment model as well as funds and property management businesses. If the Proposed Transaction is approved, CPF Unitholders may have improved income and capital growth prospects through holding Cromwell Securities compared to holding units in CPF on a standalone basis.
Other advantages Other advantages of the Proposed Transaction to CPF Unitholders include: if the Proposed Transaction is approved, CPF Unitholders will own securities in an entity which is significantly larger, more diversified and has a higher grade portfolio than CPF on a standalone basis. In particular:
- Cromwell is approximately 30 times larger than CPF on a standalone basis based on the total NTA of CPF and Cromwell as at 30 June 2012 of $26.8 million and $789.0 million, respectively
- CPF Unitholders will hold an interest in a larger, more diversified property group that includes a number of high grade commercial, retail and industrial properties across Australia, and funds management and property management businesses, all of which will enhance geographic and property sector diversification. Cromwell’s investment portfolio consists of 22 properties compared to 5 properties held by CPF
- larger property groups have a number of benefits over their smaller counterparts including a wider spread of vacancy risk and tenant default risk amongst a greater tenant base, and greater efficiency of corporate and other overhead costs which are spread across a larger property base
- Cromwell has a longer weighted average lease expiry (WALE) of 6.0 years compared to 3.7 years for the Properties held by CPF CPF Unitholders will receive Cromwell Securities as consideration under the Proposed Transaction. Cromwell has historically paid regular quarterly distributions to securityholders whereas, the distributions of CPF have been suspended again as of July 2012 as an externally managed property trust, CPF currently pays fund management fees to CPF RE (although in recent times CPF RE has charged a reduced management fee). If the Proposed Transaction proceeds, CPF Unitholders will hold an interest in Cromwell which will include both CPF and CPF RE. Accordingly, the payment of fund management fees to third parties will be eliminated, and these fees will be internalised at no cost. Disadvantages of the Proposed Transaction The likely disadvantages to CPF Unitholders if the Proposed Transaction is approved include: Significant decrease in earnings per security Subsequent to the implementation of the Proposed Transaction, Cromwell is estimated to have forecast financial year ended 30 June (FY) 2013 operating earnings per unit of 7.6 cents per Cromwell Security, which will equate to 1.74 cents per CPF unit based on the merger ratio of the Proposed Transaction. In comparison, CPF on a standalone basis is estimated to have forecast FY2013 operating earnings per unit of 2.8 cents per unit. If the Proposed Transaction proceeds, CPF Unitholders will experience a 37.9% reduction in earnings per unit.
3 Based on an analysis of transactions involving A-REITs between August 2009 and June 2012 as sourced from Connect 4 and Capital IQ
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 6
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 19
However, we note that in July 2012, following the failure of the primary tenant at the Smithfield property, CPF announced that distributions would be suspended and no distributions are expected to be paid in respect of FY2013. The Fund is not expected to be in a position to recommence distributions until its LVR for its Bank Loan facility is reduced and the majority of the remaining vacancy is leased and the cost of re-leasing paid (i.e. lease incentives). CPF has indicated that there is no certainty when, or if, CPF Unitholders will re-commence receiving distributions, or the amount which will be able to be distributed. Change in the risk profile of the investment As a result of the Proposed Transaction, there will be a change in the risk profile of the underlying investment held by CPF Unitholders. Cromwell’s current business model is more diverse than that of CPF, which holds direct property investments, and includes income generation from funds and property management in addition to its more diverse property portfolio. We note that the funds and property management activities of Cromwell generated approximately 10% of revenue in FY2012, and it is Cromwell’s intention that funds and property management activities will not contribute more than 20% of its operations going forward. It is possible that the composition of this broadened investment portfolio may not suit individual investors’ preferences, in particular, investors who sought to gain exposure to direct property investment only. Security pricing will be more volatile Under the Proposed Transaction, the consideration to be received will be listed Cromwell Securities being one CCL share stapled with one CDPT unit, the price of which will be set by market forces. Due to the dynamic nature of the listed security market, and generally the increased volatility in equity markets of late, volatility in the price of the Cromwell Securities is likely to be higher than the unlisted unit pricing reset methodology currently used by CPF (however, as no issuances and redemptions are currently available to CPF Unitholders this is a notional pricing mechanism only). This increased volatility may not appeal to all investors. Change in the nature and frequency of the distributions Distributions have historically been paid to CPF Unitholders monthly, although distributions for the Fund have recently been suspended. If the Proposed Transaction proceeds, Cromwell will continue to pay securityholders quarterly distributions. Depending upon individual investors’ preferences, this may be considered a disadvantage for those preferring the prospect of more regular payments. Foreign CPF Unitholders will be unable to participate in the Proposed Transaction Foreign CPF Unitholders (excluding those residents in New Zealand) are not entitled to receive Cromwell Securities as consideration for their CPF units under the Proposed Transaction, and there will be a sale facility established for those investors ineligible to participate in the Proposed Transaction. Refer to section 2 of the Explanatory Memorandum for further information. Consequently, foreign CPF Unitholders will be unable to participate in the future growth associated with the CPF investment portfolio or in Cromwell, unless they subsequently purchase Cromwell Securities on market. CPF Unitholders will have a diluted interest in the Properties Whilst there is no certainty that the value of the Properties will appreciate, general market sentiment indicates that the current stage in the economic cycle is unlikely to be an optimum time to realise full value for real estate investments. Due to the high financial leverage of the Fund, any appreciation in the Properties over time would be likely to translate to a significant improvement in the NTA value of CPF. If the Proposed Transaction proceeds, the exposure of CPF Unitholders to any medium term upside in the values of the Properties will be diluted through the participation of Cromwell security holders. However, this will be mitigated by the fact that CPF Unitholders will also participate in the future growth prospects of Cromwell which is exposed to similar industry cycles. Other matters Tax implications The tax consequences of the Proposed Transaction may vary depending on the particular circumstances of an individual CPF Unitholder. However we note the proportion of tax deferred income distributable from Cromwell will be lower in the future in comparison to the distributions that may become available from CPF on a standalone basis (if it were to re- commence distributions). Individual investors should consult their tax advisors in relation to their particular circumstances. Further details in respect of the potential taxation implications are provided in Annexure 2 of the Explanatory Memorandum.
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 7
20 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
No alternative offers for the Fund have been received As at the date of our independent expert’s report, CPF has not received any alternative offers for its units. Conclusion on reasonableness On balance, in our opinion, the advantages of the Proposed Transaction outweigh the disadvantages. Opinion In our opinion, the Proposed Transaction is fair and reasonable to CPF Unitholders. It is therefore in the best interests of CPF Unitholders. An individual CPF Unitholder’s decision in relation to the Proposed Transaction may be influenced by his or her particular circumstances. If in doubt investors should consult an independent adviser, who should have regard to their individual circumstances. This opinion should be read in conjunction with our detailed report which sets out our scope and findings.
Yours faithfully DELOITTE CORPORATE FINANCE PTY LIMITED
Robin Polson Rachel Foley-Lewis Director Director
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 8
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 21 4. The Merger Proposal
4.1. Current Position of the Fund until gearing is reduced, the majority of the remaining vacancies are leased and the costs of re-leasing paid. CPF was established in 2006 as an open ended, unlisted property trust with the aim of delivering a stable, tax effective The current vacancies in CPF Properties (specifically the monthly distribution and capital growth from quality property Smithfield Property and to a lesser extent the Prospect assets. When units in CPF were first offered to the public, Property) reduce the net property income of the CPF initial assets had been identified and the Fund aimed to Properties. There will be costs incurred to lease these increase diversification further over time through acquiring vacancies including lease commissions, tenant incentives additional properties. and capital expenditure. These costs may be significant. If these vacancies cannot be leased in line with expectations Following the onset of the financial crisis in 2008 and the some or all of this capital expenditure may be delayed, but resulting fall in property values, CPF RE took a number of the Operating Earnings of the Fund and property valuations actions to stabilise the Fund and ensure CPF maintained the will be negatively impacted. support of its lenders. This included the sale of a number of assets. Nonetheless, during this period, both the unit Accordingly, distributions are expected to continue to be price and the Fund’s Operating Earnings and NTA per CPF suspended until at least June 2013. However they may be Unit deteriorated significantly and CPF continues to face a suspended for a longer or shorter period depending on number of challenges and uncertainties over the short to future valuations, the outcome of leasing initiatives and medium term. capital expenditure requirements. Recent valuations of CPF Properties, including the impact of Although the Bank Loan does not expire until June 2015, the failure of the major tenant of the Smithfield Property, have the Cromwell Property Loan for $19.8 million expires on seen a further deterioration of values and, as a result, NTA per 30 September 2012 and will have to be renegotiated should CPF Unit. This resulted in the Fund’s gearing as at 30 June the Merger not be implemented. Since Cromwell needs to 2012 increasing to 79%. It also resulted in the LVR of the Bank act in the best interests of Cromwell Securityholders when Loan increasing to 67% resulting in CPF RE negotiating a assessing whether or not to extend the term of the Cromwell temporary increase in this limit to 70% for a 12 month period Property Loan, there is no certainty as to whether agreement from 30 June 2012 to 30 June 2013. In return, the interest rate can be reached on the extension and, if so, on what terms. was increased by 0.15% pa for so long as the LVR exceeds Cromwell has not yet made a decision in this respect and 65%. The negotiations did not result in any other unusual or negotiations between Cromwell and CPF in relation to the material obligations being imposed on CPF. Cromwell Loans are not expected to occur unless the Merger does not proceed. Negotiations between Cromwell and CPF If the Merger is not implemented it is likely the Fund will RE in relation to the Cromwell Loans will only occur if the need to take action to reduce the LVR for the Bank Loan to Merger is not implemented. 65% or lower by June 2013. If the LVR is not reduced by this time CPF would be in breach of its Bank Loan subject to any As a result, there remains uncertainty as to whether CPF further negotiations between CPF RE and its lender. It is also will be able to continue as a going concern and therefore likely CPF RE will seek to reduce the Fund’s overall gearing to whether it will realise its assets and extinguish its liabilities below 55%, which is considered to be a more sustainable long in the normal course of business at the amounts stated in term level, to reduce the impact of any further valuation falls the Financial Information. in the future. This is likely to require significant changes to Section 6 on page 31 contains further detail regarding the the Fund’s capital structure, portfolio, or both. background of CPF. Investment confidence remains weak and there is evidence that achieving either of those goals in the short term would 4.2. Strategic Alternatives require transactions to be undertaken at a discount to prevailing asset values. Raising equity or selling assets at The Independent Directors have given detailed consideration below current values is likely to materially dilute the future to a range of strategic alternatives to enable the challenges Operating Earnings and NTA per CPF Unit. facing CPF to be addressed whilst maximising the value of remaining equity and future distributions and providing CPF has been closed to redemptions since January 2009 as liquidity for CPF Unitholders where possible. Each of these a result of uncertainty over the values of the CPF Properties alternatives is discussed below. and very limited surplus cash with which to fund redemptions. Since that time CPF Unitholders have not had an opportunity 4.2.1. Immediate Asset Sales to withdraw from the Fund, although many CPF Unitholders have expressed a desire to redeem their CPF Units. A number of properties have been sold since 2009 to reduce gearing and ensure the Fund remained within Bank CPF suspended the payment of distributions in July 2012 due Loan covenant limits. Further asset sales would enable a to the failure of the major tenant at the Smithfield Property continuation of this process, if the proceeds were solely used to and the need to reduce the LVR for the Bank Loan. CPF RE repay debt to arrive at a sustainable capital structure. However has entered into a conditional agreement with a tenant for it remains a very difficult market in which to sell assets unless part of the vacant space, but if finalised this will result in they have broad market appeal, which is generally considered CPF providing a rent-free period and completing property to be those properties which are in premium locations or improvements to meet the tenant’s requirements. The Fund is have long lease terms with quality tenants. The impact of not expected to be in a position to recommence distributions
22 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4. The Merger Proposal
recent market events means each of the CPF Properties has Further, there is no guarantee that CPF Properties could be some challenges and none of them are expected to have the sold at or above current valuations. If CPF Properties were necessary broad market appeal. In the case of the Woden sold at less than the current valuations, then the amount Property and the Hurstville Property, although there is a 4-5 returned to CPF Unitholders would be less than the current year remaining lease period, each of the properties has a net assets of the Fund. Given the current high gearing of single tenant for the majority of the building and a purchaser the Fund, selling CPF Properties for less than the current would likely require a significant discount in order to accept valuation could have a substantial impact on the capital the risk that the existing tenant may not renew at the end of returned to CPF Unitholders. Examples of the impact on the existing lease. The Prospect Property has some vacancy the CPF’s net assets and NTA per CPF Unit of a sale of CPF and the bulky goods asset class is not in favour in the current Properties at various discounts and premiums to current market. The Smithfield Property has significant uncertainty as valuations are set out in the table below. a result of the current vacancy and general weak tenant profile. A sale of all of the CPF Properties at current valuation is As an example of current market sentiment, the Hurstville forecast to realise 14.2 cents per CPF Unit after allowing for Property and Smithfield Property were taken to market in early selling costs. Each ± 5% change in the sales price compared 2012, with neither attracting an offer which provided sufficient to the current valuation would increase or decrease the certainty to warrant further consideration. There is therefore amount by approximately 4.8 cents per CPF Unit. significant uncertainty over both how long it would take to sell The NTA per CPF Unit used for the Merger Ratio is $0.1546 one or more of the CPF Properties and the price which could (being the 30 June 2012 NTA adjusted for Transaction Costs). be obtained for any CPF Property. See Section 4.4 on page 24. Given the uncertainty, potential In addition, the sale of a CPF Property would generally incur risks and likely lengthy timeframe for this alternative to be costs including agent’s fees, marketing and legal costs. These completed, the Independent Directors have determined that are estimated at 1.5% of the current value of CPF Properties, this is an inferior alternative to the Merger. or $2.5 million, and would have the impact of reducing the net proceeds available to CPF Unitholders by approximately 1.5 4.2.3. Recapitalisation of CPF through a capital raising cents per CPF Unit if all the CPF Properties were sold at their Based on current market precedent, a capital raising would current valuations. be required to be undertaken at a substantial discount to the A sale of one or two of the CPF Properties would be unlikely to 30 June 2012 NTA per CPF Unit to raise the amount necessary result in any real liquidity for CPF Unitholders in the short to to reduce gearing to a more acceptable level in the current medium term, as gearing would need to be reduced significantly market. Even then, similar raisings by other unlisted property before any withdrawal offer could be made. To reduce gearing funds in recent history have proven to be very difficult, and to a more appropriate level of 55%, asset sales of approximately in some cases unsuccessful. Raising equity at a discount to $92.9 million would be required. The asset sales target NTA would be likely to materially dilute Operating Earnings represents 55% of the Fund’s property assets at 30 June 2012. and NTA per CPF Unit and would adversely impact those CPF Given the likely dilution of NTA per CPF Unit, potential risks Unitholders who do not participate in such an offering. and limited ability to provide liquidity for CPF Unitholders for As an example, to reduce gearing to a more appropriate level this alternative, the Independent Directors have determined of 55%, an equity capital injection of approximately $41.8 that this is an inferior alternative to the Merger. million would be required. The capital raising would represent approximately 156% of CPF’s net assets at 30 June 2012. 4.2.2. Managed wind-up and sale of all CPF Properties over time Further, for this alternative to provide any liquidity for CPF Unitholders, the amount of capital raised would need to be Returning capital to CPF Unitholders through an orderly greater than that required to stabilise the Fund. If such an wind-up of CPF over time would involve the sale of each of excess amount could be raised it is likely to only allow a pro- the CPF Properties as and when a reasonable price could rata withdrawal offer to be made rather than providing a full be achieved with proceeds used to repay the Bank Loan, liquidity solution. the Cromwell Loans and other obligations first, and then to This alternative is considered to be an inferior alternative make progressive returns of capital to CPF Unitholders. to the Merger due to the dilutionary impact on existing For the reasons noted above, the timing for completion of CPF Unitholders and the low likelihood of it providing any a managed wind-up and the amount of net proceeds that meaningful liquidity. could be delivered are uncertain. CPF Unitholders may need to wait for up to 2 years or longer before receiving the net proceeds of a wind-up.
30 Jun 12 No Discount 5% Discount 10% Discount 15% Discount 5% Premium 10% Premium 15% Premium
Net Assets 26,826,537 24,300,537 16,139,812 7,979,087 (181,639) 32,461,262 40,621,987 48,782,712 Units on Issue 171,000,702 171,000,702 171,000,702 171,000,702 171,000,702 171,000,702 171,000,702 171,000,702 NTA per CPF Unit $0.157 $0.142 $0.094 $0.047 ($0.001) $0.190 $0.238 $0.285
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 23 4.2.4. Stand alone listing Of the approximately 171 million CPF Units on issue, approximately 30 million are held by Cromwell and will not The listing of CPF as an externally managed REIT on the ASX participate in the Merger. was considered. Potential advantages of this alternative include: The Merger Ratio has been determined by negotiation between CPF RE and Cromwell, having regard to the NTA • some liquidity since CPF Units would be able to be sold of both CPF Units and Cromwell Securities as at 30 June through the ASX; 2012, adjusted for Transaction Costs. Adjusted NTA for CPF • potentially more capital raising opportunities due to a was determined at $0.1546 for each CPF Unit. Adjusted NTA wider potential capital base; and for Cromwell was determined at $0.6727 for each Cromwell • the Fund may attract takeover attention. Security. However, the main disadvantage is that, given the Fund’s The Merger Ratio of 0.2298 Cromwell Securities for each high gearing, suspended distributions and uncertainty over CPF Unit was determined by dividing the adjusted NTA per future leasing and valuation outcomes, it is expected that CPF Unit by the adjusted NTA per Cromwell Security (0.1546 CPF would trade at a material discount to its prevailing NTA. / 0.6727 = 0.2298). As the Merger Ratio has been determined Further, levels of trading are likely to be quite low and this on an NTA for NTA basis, there is forecast to be no material may mean there might not be enough liquidity for all those change to the effective NTA per CPF Unit before and after the CPF Unitholders who wish to sell their CPF Units to do so in a Merger. Both CPF RE and CDPT RE consider that determining timely manner. This might also result in high price volatility. the Merger Ratio based on the respective adjusted NTAs Given the uncertainty and likely substantial trading discount, of both a CPF Unit and a Cromwell Security is appropriate the Independent Directors have determined that this is an because it reflects the underlying value of the property and inferior alternative to the Merger. other tangible net assets held by each entity. The Merger Ratio means that, based on the closing price of 4.3. Merger Rationale $0.7430 for Cromwell Securities on 24 August 2012, Merger Participants are effectively receiving approximately $0.1707 The Merger is considered by the Independent Directors per CPF Unit held. Further information on the VWAP of of CPF RE to be the best alternative for CPF, because Cromwell Securities over the past 12 months and the effective it best meets the primary objectives of maximising the consideration per CPF Unit of those trading values is in future prospects for distributions and capital value for CPF Section 4.5 below. You should note that, as listed securities, Unitholders who wish to retain some exposure to the CPF the actual value of Cromwell Securities on the Implementation Properties, whilst achieving liquidity at a reasonable price for Date and the actual value at which you might sell any CPF Unitholders who wish to realise their holding. Cromwell Securities issued to you cannot be determined at this time. 4.4. Merger Consideration Based on the Merger Ratio it is expected that approximately 32.4 million Cromwell Securities will be issued to CPF Merger Participants will be entitled to the Merger Unitholders, representing 2.7% of Cromwell Securities on Consideration, which involves the issue of 0.2298 Cromwell issue after the Merger. Existing Cromwell Securityholders Securities for each CPF Unit held at the Record Date. When prior to the Merger will hold 97.3% of Cromwell Securities on the Merger Consideration is calculated, the number of completion of the Merger. Cromwell Securities to which Merger Participants are entitled to may include a fraction of a Cromwell Security. Fractions will be rounded down to the nearest whole Cromwell Security. 4.5. How changes in the Cromwell Security Merger Participants will also be entitled to Cromwell’s price impact the Merger Consideration distribution payment for the September 2012 quarter, which is Although the number of Cromwell Securities issued for each expected to be paid on or about 14 November 2012. Provided CPF Unit is fixed, the value of Cromwell Securities will vary they do not sell their Cromwell Securities prior to the record from day to day based on market conditions and the market’s date for that distribution, all CPF Unitholders on the Record assessment of the future performance of Cromwell. As a result, Date, except Foreign Investors and Cromwell, will be Merger neither CPF RE nor Cromwell is able to predict the actual value Participants. of the Merger Consideration on the Implementation Date nor Foreign Investors will not be eligible to participate in the what Merger Participants might be able to sell their Cromwell Merger due to the difficulty and cost of complying with Securities for on the ASX in the future. securities laws in the various countries in which Foreign Information in relation to the historical price of Cromwell Investors are located. Accordingly, if the Merger is approved Securities is available from the ASX website at and implemented, Foreign Investors will participate in the www.asx.com.au. The graph below provides information on Foreign Investor Facility and will receive cash net of costs the price of Cromwell Securities from December 2006, when rather than Cromwell Securities as Merger Consideration. the stapling transaction occurred, to 30 June 2012. This See Section 4.6 on page 25 for further information about the data has been compared to the published NTA per Cromwell Foreign Investor Facility. Security in each 6 month period to provide an indication of the historical volatility of Cromwell Securities relative to underlying NTA per Cromwell Security.
24 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting $1.40 The Foreign Investor Facility Nominee will seek to achieve CMW Security Close Price NTA the best price for the Cromwell Securities that can be $1.20 reasonably obtained at the time. However, the price may be $1.00 more or less than the market price of Cromwell Securities as traded on ASX before or after the sale by the Foreign Investor $0.80 Facility Nominee.
$0.60 4.6.1. Merger Implementation Agreement and Deed Polls $0.40 The Merger Implementation Agreement and the Deed Polls $0.20 are summarised in Section 12 on page 60.
$0.00 In particular, you should note that, if the Merger is June June June June June June June implemented and the CPF Constitution is amended by the 2006 2007 2008 2009 2010 2011 2012 Supplemental Deed, all Merger Participants, including those who vote against the Merger and those who do not vote, will be Since stapling in late 2006, Cromwell Securities have traded deemed to have warranted to Cromwell that their CPF Units from a high of $1.34 on 20 July 2007 to a low of $0.395 on are fully paid and are not subject to any encumbrances or 18 February 2009. Pro forma NTA per Cromwell Security interests of third parties or restrictions on transfer of any kind. on stapling in 2006 was $0.71 and increased to a high of Each CPF Unitholder is also deemed to warrant that it $1.02 on 31 December 2007 before falling to $0.67 at 30 June has full power and capacity to sell and transfer CPF Units 2012. registered in its name. If the warranty is breached, Merger Information on the VWAP of Cromwell Securities over Participants may be liable to pay to Cromwell any amounts various periods of up to 12 months before 24 August 2012 Cromwell pays to acquire clear title to their CPF Units. and the effective price per CPF Unit is shown below: 4.6.2. Costs of the Merger Period VWAP Effective Price per CPF Unit The total expenses of the Merger are estimated to be 1 day $0.743 $0.1707 approximately $1,008,000. Of these estimated expenses, CPF 5 days $0.741 $0.1704 is expected to pay approximately $397,000 including legal 10 days $0.738 $0.1697 fees, fees for the Independent Expert and other advisers, 30 days $0.726 $0.1668 Explanatory Memorandum preparation costs and Meeting 90 days $0.703 $0.1616 costs. Cromwell is expected to pay approximately $611,000 6 months $0.707 $0.1625 including legal fees, listing fees, property stamp duty and 12 months $0.689 $0.1583 fees for other advisers. These expenses will be paid from CPF’s or Cromwell’s cash reserves as applicable. 4.6. Implementation of the Merger 4.6.2.1. Deloitte Corporate Finance Pty Limited If the Resolutions are passed at the Meeting and the other conditions (described in Section 12 on page 60) are satisfied or Deloitte Corporate Finance Pty Limited is entitled to receive waived, CPF RE and Cromwell will take, or procure the taking, professional fees of approximately $65,000 in connection of the steps necessary to implement the Merger (including with the preparation of the Independent Expert’s Report lodging a copy of the amended CPF Constitution with ASIC). appearing in Annexure 3 on page 83. On lodgement of the amended CPF Constitution with ASIC – expected to occur on or about 4 October 2012 – the Merger 4.6.2.2. Minter Ellison will become effective and the implementation steps will be Minter Ellison is entitled to receive professional fees of taken. approximately $210,000 for work carried out in connection Implementation of the Merger involves all CPF Units being with the Merger on behalf of CPF. Those fees include transferred to Cromwell (except those it already owns). approximately $10,000 in connection with the preparation of If all of the conditions precedent to the Merger (contained the Taxation Report appearing in Annexure 2 on page 77. in the Merger Implementation Agreement) are satisfied or Minter Ellison will also be entitled to receive professional (where applicable) waived, the Merger is expected to be fees of approximately $135,000 for work carried out in implemented on or around 4 October 2012. connection with the Merger on behalf of Cromwell. Cromwell Securities to which Foreign Investors would otherwise be entitled to as Merger Consideration, will be 4.6.2.3. JR Securities Limited issued to the Foreign Investor Facility Nominee who will JR Securities Limited is entitled to receive professional fees sell those Cromwell Securities on ASX after the record of approximately $40,000 in connection with the preparation date for Cromwell’s September quarter distribution and of the Investigating Accountant’s Report appearing in within 15 Business Days of the Implementation Date. Annexure 1 on page 68. Each Foreign Investor will receive their pro-rata share of the net sale proceeds by cheque within 10 Business Days of the sale and will receive payment for the September quarter distribution at the same time as Merger Participants. Foreign Investors are not required to take any action to participate in the Foreign Investor Facility.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 25 4.7. Consequences if the Merger Strategic alternatives which would also be considered by is not implemented CPF RE if the Merger is not implemented are set out in Section 4.2 on page 23. If the Merger is not implemented, both CPF and Cromwell The Fund is not expected to be in a position to recommence will continue as separate entities managed by Cromwell. distributions until the LVR for the Bank Loan and the gearing CPF Unitholders will continue to hold their CPF Units and for the Fund are reduced to acceptable levels, the majority Cromwell will continue to hold approximately 17.6% of of remaining property vacancies are leased and associated the CPF Units on issue. In this case, each party will bear leasing and capital works costs are fully funded. its own costs associated with the Merger. The majority of costs payable by CPF are attributable to structuring and documenting the terms of the Merger and the completion 4.8. Cromwell’s rationale for the Merger of this Explanatory Memorandum and associated reports. These costs will be payable regardless of whether the Cromwell is a listed Australian real estate investment trust Merger is implemented or not. If the Merger does not and property fund manager with approximately $2.4 billion in proceed, costs estimated to be payable by CPF are $397,000. assets under management as at the date of this Explanatory Memorandum. Cromwell actively manages all its property On a standalone basis CPF faces a number of challenges assets internally to ensure that they are managed in over the short and medium term which provide for significant accordance with the interests of its investors and its tenants. uncertainty. Information about Cromwell is contained in Section 7 on If the Merger is not implemented, CPF RE will seek to page 38. address these challenges. In this case it is likely CPF RE Cromwell currently holds approximately 17.6% of the CPF will need to sell one or more of the CPF Properties or raise Units on issue. Those CPF Units are subject to the same further capital in order to reduce the LVR of the Bank Loan terms and conditions as all other CPF Units. and restore the Fund’s gearing to a more sustainable long term level. As at 30 June 2012, the Fund’s LVR under its Cromwell has also lent money to CPF, by way of two Bank Loan was 67%. In June 2012 the CPF RE negotiated Cromwell Loans totalling approximately $24 million. The a temporary increase in the LVR limit under the Bank Loan Cromwell Property Loan, for $19.8 million, expires and from 65% to 70% for the period 30 June 2012 to 30 June is therefore due to be repaid by 30 September 2012. The 2013. In return, the interest rate was increased by 0.15% pa remaining amount is the Cromwell Industrial Land Loan for so long as the LVR exceeds 65%. The negotiations did and is repayable by CPF on demand, although Cromwell has not result in any other unusual or material obligations being undertaken not to demand this amount until the Industrial imposed on CPF. If the LVR is not reduced to 65% or lower by Land is sold or otherwise realised. The Cromwell Loans are 30 June 2013, the Fund would be in breach of its Bank Loan unsecured and rank behind the Bank Loan but ahead of CPF subject to any further negotiations between CPF RE and its Unitholders’ interests. This means that, if CPF is wound up, lender. the Bank Loan would be repaid in priority to the Cromwell Loans and the Cromwell Loans would be repaid in priority to At the date of this Explanatory Memorandum CPF RE has a return of equity to CPF Unitholders. not determined what alternative strategy it will pursue if the Merger does not proceed. It is considered most likely The Merger will enable Cromwell to best manage its material that the sale of one or more of CPF Properties would be the unit holding in CPF and its exposure to CPF via the Cromwell preferred alternative, however it is uncertain whether this Loans as it means that Cromwell will acquire a 100% interest can be achieved at a reasonable price and in a reasonable in CPF Properties and the other assets and liabilities of the time frame. The alternative strategy chosen will depend on Fund. This will enable Cromwell to benefit fully from the the circumstances prevailing at the relevant time a decision risks and rewards of owning CPF Properties in the future and is required to be made. ensure sufficient funding is available to undertake the most appropriate strategy for each CPF Property in the future. There is no certainty as to the timing or price at which any of the CPF Properties could be sold as it remains a difficult In addition, CPF Properties together have a higher income market for assets which are outside premium locations or yield than that of the Combined Properties. As a result, those that do not have substantial lease terms with high the Merger is forecast to increase Operating Earnings of quality tenants. Combined Cromwell from 7.5 cents per Cromwell Security to 7.6 cents per Cromwell Security in FY13. This is primarily If a sufficient number of CPF Properties cannot be sold, due to the higher income yield from CPF Properties and the Fund may be required to raise further equity. There is some cost savings, offset by a reduction or elimination in no certainty as to the amount that could be raised or the fees charged to CPF by Cromwell. However, the Merger is price at which any new CPF Units would need to be issued. expected to increase Cromwell’s gearing from 53% to 54%. However it is likely, based on other similar transactions in recent times, that new CPF Units would need to be issued at Cromwell expects to also benefit from the Merger as the a substantial discount to underlying NTA of each CPF Unit to nature of the transaction means that Cromwell will incur attract the required equity. lower transaction costs than if it acquired the CPF Properties directly. Also, since Cromwell is familiar with the CPF CPF RE would also need to negotiate an extension of the Properties through its management function, due diligence Cromwell Loans for a further period during which it would costs will be lower than would be the case if the CPF need to take steps to reduce the gearing for the Fund. Properties were acquired on market.
26 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4.9. Independent Directors expressed a desire to realise their holding in CPF. If the Recommendation Merger is implemented, CPF Unitholders will have the opportunity to sell their Cromwell Securities on the ASX but The Merger enables CPF Unitholders who wish to realise are not required to do so and may continue to hold them. their investment to do so by selling the Cromwell Securities However, as to the extent of liquidity of Cromwell Securities, they receive on ASX. CPF Unitholders who elect to retain see Section 4.11.1 on page 28 and Section 8.2.2 of the their Cromwell Securities will have exposure to the larger, Independent Expert’s Report. more diversified Cromwell Property portfolio, whilst retaining some exposure to the CPF Properties. The Independent 4.10.3. Continued distributions, albeit at a lower rate Directors therefore feel that the Merger best satisfies the than previously interests of CPF Unitholders by maximising the value of remaining equity whilst providing both greater distribution CPF ceased paying distributions to CPF Unitholders in July stability and a liquidity option. 2012 following the failure of the tenant at the Smithfield Property, the impact of lost rent and the expected capital The Independent Directors have carefully considered the required to re-lease the vacancy. advantages and disadvantages of the Merger and potential alternatives. The Independent Directors have concluded If the Merger is implemented, Merger Participants will be that the potential advantages of the Merger outweigh entitled to the distribution Cromwell pays its securityholders the potential disadvantages and are greater than the in relation to the September quarter, provided they continue potential advantages of the other alternatives. Therefore, to hold their Cromwell Securities until the record date for the Independent Directors believe that accepting the that distribution. Merger is in the best interests of CPF Unitholders and Cromwell has forecast to pay distributions of 7.25 cents they unanimously recommend that you vote in favour of per Cromwell Security in relation to FY13, equivalent to the Merger, in the absence of a Superior Proposal. 1.67 cents per CPF Unit. Cromwell pays distributions each Set out in the Sections below are the key reasons why you quarter, with the amount and timing of each quarter’s might vote for or against the Merger and key risks arising distribution being announced on the ASX towards the end of from the Merger for CPF Unitholders. each quarter. There will also some timing differences as a result of the longer period between declaration and payment The Independent Expert has also considered the advantages of distributions. and disadvantages of the Merger and has concluded that the Merger is fair and reasonable and therefore in the best The forecast FY13 distributions for Cromwell Securities and interests of CPF Unitholders. relevant key dates are: The Independent Expert’s Report is summarised in Section Quarter Expected Expected Amount Effective 3 on page 13 and set out in full in Annexure 3 on page 83. ending Record Payment (cents per Amount You should read the Independent Expert’s Report in full Date Date Cromwell (cents per before deciding how to vote. Security) CPF Unit)* Sept 2012 5 Oct 2012 14 Nov 2012 1.8125 0.4165 4.10. Why you might vote FOR the Merger Dec 2012 31 Dec 2012 13 Feb 2013 1.8125 0.4165 4.10.1. The value of the Merger Consideration is attractive Mar 2013 29 Mar 2013 15 May 2013 1.8125 0.4165 compared to alternatives Jun 2013 28 Jun 2013 14 Aug 2013 1.8125 0.4165 The Independent Expert has determined the fair market value of a CPF Unit on a control basis to be between * The Effective Amount per CPF Unit is determined by multiplying the amount per $0.1421 and $0.1619. This valuation has been determined Cromwell Security by the Merger Ratio. by valuing the net assets of CPF on a going concern basis, which estimates the fair value of a CPF Unit by aggregating 4.10.4. Broader property asset diversification the value of its assets and liabilities. This valuation takes If the Merger is implemented CPF Unitholders will have into account the underlying value of the CPF Properties exposure to a much larger, more diversified property but does not take into account any selling costs or make portfolio with: any deduction for other winding up costs or the illiquidity of the Fund. • properties with a combined book value of approximately $1.9 billion, compared to approximately $168 million for The Independent Expert has valued the Merger the CPF Properties; Consideration offered to CPF Unitholders at between • a more diversified portfolio of 27 Combined Properties $0.1655 and $0.1724 per CPF Unit. This value has been compared to 5 CPF Properties; and arrived at by valuing Cromwell Securities with reference primarily to the recent trading price of Cromwell Securities • a combined property portfolio of a significantly higher on the ASX, and multiplying the resulting value by the Merger quality than the CPF Properties, for instance: Ratio. The alternatives to the Merger that were investigated −− occupancy by gross income increases from 87.9% by the CPF RE are discussed in Section 4.2 on page 23. to 95.6%;
4.10.2. Introduction of liquidity for CPF Unitholders −− WALE increases from 3.7 years to 6.0 years; and −− greater diversification of tenants without Withdrawals from CPF have been suspended since January compromising tenant quality. 2009 and an increasing number of CPF Unitholders have
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 27 Below is a comparison of key statistics with regard to the Therefore, if the Merger is implemented, CPF Unitholders CPF Properties and the Combined Properties: will hold an investment with reduced gearing and greater diversification of financiers and debt expiry. This should CPF Combined reduce the risk of an adverse impact from expiring debt Properties Properties facilities in the future. Portfolio value $168.4 m $1,892.8 m 4.10.6. Potential for reduced costs of debt Number of properties 5 27 The nature and extent of the Cromwell Properties and Occupancy 87.9% 95.6% Cromwell’s relatively better financial position compared to CPF, means that Cromwell may be better placed to negotiate WALE 3.7 years 6.0 years more favourable terms with its financiers and minimise Weighted average capitalisation rate 9.88% 8.42% future debt costs. Cromwell may be able to achieve lower debt costs for reducing the LVR on individual facilities, or Net lettable area 82,297 m2 587,684 m2 entering into longer interest hedging arrangements. Income from government and listed 73.7% 83.3% Cromwell may also be able to take advantage of other forms tenants of debt funding in the future (for example corporate bonds or listed debt securities) to lower costs or extend the weighted average debt term. Further details of the Cromwell Properties are contained in Section 7 on page 38. Further details of the CPF Properties 4.10.7. Continuity of management are contained in Section 6 on page 31. Further details about There will be no change to the manager of the CPF Properties, the Cromwell Properties are also contained in the June 2012 so Cromwell Securityholders (including the Merger Property Portfolio booklet, which is available from Participants who continue to hold Cromwell Securities) will www.cromwell.com.au/properties. benefit from the embedded knowledge of the CPF Properties as well as the tenant relationships being able to be retained. 4.10.5. Reduced risk through lower gearing and greater Despite the disappointing performance of CPF, the overall diversification of debt sources performance of Cromwell and its managed properties and If the Merger is implemented CPF Unitholders will have other funds has significantly exceeded relevant performance exposure to: benchmarks over medium and long term periods. Further information about the performance of Cromwell and its • lower gearing of 54% in Combined Cromwell compared managed funds is in Section 7.4 on page 40 and Section 7.6 on to CPF at 79%; page 42. • a more diversified group of lenders and facilities secured over different pools of assets; and 4.10.8. Growth potential in operating businesses • similar weighted average debt term of 2.5 years, but with Cromwell’s property management, funds management finance facilities that expire on different dates (which and development businesses contributed less than 5% of should assist with reducing any refinancing risk). Cromwell’s Operating Earnings in FY12 and are forecast Below is a comparison of key statistics as at 30 June 2012 to contribute less than 5% in FY13. Cromwell continues with regard to CPF and Combined Cromwell’s borrowings: to undertake a number of initiatives in this area and these businesses represent an opportunity to contribute CPF Combined significantly to the earnings growth for Cromwell in the Cromwell medium term. Number of lenders 2 5 Bank loans $112,250,000 $1,080,801,000 4.11. Why you might vote AGAINST the Merger Total borrowings $136,112,000 $1,080,801,000 LVR (Bank loans only) 67% 57% 4.11.1. Change in nature of investment Gearing 79% 54% Cromwell Securities are listed on the ASX and have different benefits and risks than CPF Units, which are unlisted. Weighted average debt expiry 2.5 years 2.5 years For example, the value of Cromwell Securities can and does change regularly as the value may vary with market Weighted average interest hedging 1.9 years 2.5 years conditions. Cromwell Securities may be traded at different Interest cover ratio FY12 (actual 1.5 times 2.2 times prices day to day or week to week, unlike the price of CPF CPF, pro-forma Combined Cromwell) Units which typically only vary as one or more of the CPF Properties are revalued. Interest cover ratio FY13 (forecast) 1.5 times 2.3 times Additional detail on historical trading prices of Cromwell Securities is contained in Section 4.5 on page 24.
28 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting In addition, although Cromwell has a total market In this case, CPF Unitholders may do better on a standalone capitalisation of approximately $867,702,000 as at 24 August basis than under the Merger. However, as noted in Section 6 2012, the volume of Cromwell Securities traded on any on page 31, CPF is subject to significant future uncertainty day or in any week can fluctuate significantly. This means and risk if the Merger does not proceed and any alternative that a Cromwell Securityholder who wishes to sell or buy strategy may result in sales of one or more CPF Properties a material number of Cromwell Securities may experience and the possibility of additional CPF Units being issued, delays in doing so and may experience pricing volatility. The which would be likely to dilute the benefits of any future average volume of Cromwell Securities traded daily on the increases in value. ASX in the past 12 months up to 24 August 2012 is $673,949 Also, if the Merger is implemented, growth in the value and the average value of Cromwell Securities traded daily of the Cromwell Properties would also be shared by CPF on the ASX in the past 12 months up to 24 August 2012 Unitholders who elected to retain their Cromwell Securities. is $464,126. The average number of CPF Units held by CPF Unitholders (excluding Cromwell) is 63,143, which is 4.11.6. Reduction in earnings equivalent to 14,510 Cromwell Securities at the Merger Ratio. For FY12 CPF achieved Operating Earnings of 2.9 cents per Listed securities may not be appropriate for your investment CPF Unit. CPF is forecasting Operating Earnings of 2.8 cents objectives, financial situation, tax position or particular per CPF Unit for FY13. Under the Merger the forecast needs. If you are unsure you should contact your financial Operating Earnings of Combined Cromwell for FY13 are adviser. 7.6 cents per Cromwell Security, which will equate to 4.11.2. Quarterly distributions not monthly distributions 1.75 cents per CPF Unit. See Section 9 on page 49 for further details of historical and forecast Operating Earnings per CPF If CPF recommences paying distributions it is expected to do Unit and Cromwell Security post Merger. so monthly (in line with past practice). However, as a listed CPF Unitholders should note that on a standalone basis CPF AREIT Cromwell pays its distributions quarterly. has ceased paying distributions and does not expect to pay any distributions during FY13. There is no certainty when, or 4.11.3. Potential variability in the implied value of the if CPF Unitholders will commence receiving distributions in Merger Consideration the future, or the amount which will be able to be distributed. If the Merger is implemented the actual value of the Merger Consideration will be subject to movements in the trading 4.11.7. No ability to undertake an alternative proposal price of Cromwell Securities. The value of the Merger If the Merger is implemented, then not all the alternative Consideration will fall or rise proportionally with any fall strategies discussed above will still be available to the CPF or rise in the trading price of Cromwell Securities on the RE. Further, any alternative proposal made by another ASX. The value of the Merger Consideration to each Merger party would no longer be able to be investigated and, if Participant will therefore depend upon when, or if, they trade appropriate, accepted. However, given the current economic their Cromwell Securities. environment and the lack of any approaches by other parties to date, it is considered unlikely an alternative proposal will 4.11.4. Broader business and resulting change in risk profile emerge that is more compelling than the Merger. If the Merger is implemented CPF Unitholders will have The period from announcement of the Merger to the Meeting exposure to the more diverse funds management and real may provide an opportunity for an alternative proposal to estate business activities of Cromwell. These activities emerge and, if that is the case, the Independent Directors include property management, funds management and, to will assess the proposal and consider whether or not it is a lesser extent, development. a Superior Proposal and whether to recommend to CPF Whilst these activities provide the potential to generate Unitholders that it be accepted. higher earnings growth than that which can be achieved from a property portfolio alone, they typically represent higher risk 4.11.8. Loss of control over CPF and the CPF Properties than the pure property investment activities of CPF. CPF Unitholders, excluding Cromwell, currently control approximately 82.4% of CPF. If the Merger is implemented 4.11.5. If asset values improve, CPF may generate better CPF Unitholders will effectively hold only 2.7% of Cromwell returns on a standalone basis and will have a similar interest in the Combined Properties, If the Merger is implemented then the benefit of any increase which will include the CPF Properties. in the future value of the CPF Properties will be shared by all Although Cromwell will have gained effective control over Cromwell Securityholders, not just CPF Unitholders. CPF and the CPF Properties, Cromwell is not paying a The majority of CPF Unitholders bought their CPF Units at or premium for control of CPF. However, there is no evidence about $1.00 per unit. The NTA of each CPF Unit as at 30 June of premiums being paid for property portfolios in the current 2012 was $0.157. It is possible that over time, should the environment such that CPF Unitholders would be unlikely property market improve, the value of the CPF Properties to be paid a control premium by any other third party. will increase. If the Merger is not implemented, then the higher gearing in CPF would assist to magnify those gains and CPF Unitholders would benefit through a higher NTA per CPF Unit.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 29 5. Risks of the Merger
If the Merger is implemented, CPF Unitholders will become 5.3. Increase in business risk Cromwell Securityholders. Since Cromwell Securities are listed this means that CPF Unitholders will be subject to The property, funds management and development activities the risks that arise from holding listed securities. Those undertaken by Cromwell can provide additional earnings additional risks are set out below. CPF Unitholders will also and above average growth in earnings, but can also increase continue to face a number of other risks common to an volatility of earnings and therefore security prices and investment in either CPF or Cromwell. Those risks are set returns. out in Section 10 on page 56. The value of fee income earned may be dependent on CPF Unitholders may not want to be subjected to the the value of underlying assets under management, the ability additional risks set out below and so may choose to vote of Cromwell to raise third party capital and form new funds against the Merger for this reason. and the performance of those funds. Cromwell may also have investments in managed funds, which will rise and fall over time. 5.1. Equity Market exposure Development activities undertaken by Cromwell in the future Cromwell Securities are listed on the ASX and so their may be greater than would be normal for CPF, which may trading price may rise or fall in value due to numerous increase development risk disclosed in Section 10 on factors which may or may not reflect movements in the page 56. underlying NTA per Cromwell Security. Since 2009 equity markets have remained very volatile. 5.4. Disputes and litigation Factors which might impact on the trading price of Cromwell Securities include the following: Disputes or litigation will occur from time to time and is most likely to be associated with Cromwell’s funds • general economic conditions, including inflation rates management, property management and development and interest; activities. This could result in financial penalties and • changes to government policy, legislation or regulations; a change in the value of Cromwell Securities. • variations in the market for listed securities, in general or for property securities in particular; 5.5. Taxation outcomes • the nature of competition on the ASX; and Although there are not expected to be any adverse tax • general operational and business risks. outcomes as a result of the Merger, the proportion of tax As a result of the volatility in the value of Cromwell deferred income from Cromwell will be lower in the future Securities, the Merger Consideration may or may not reflect than would be the case if CPF was able to recommence the underlying NTA per Cromwell Security at any time. distributions. Details on how Cromwell Securities have changed in value CCL may also pay franked or unfranked dividends in since stapling in 2006 are set out in Section 7 on page 38. the future, although it does not expect any dividends to be material. 5.2. Increase in exposure The tax consequences of the Merger for Merger to the office sector Participants will depend on their personal tax and financial circumstances. General Australian tax implications of A large proportion of Cromwell Properties are office the Merger are discussed in Annexure 2 on page 77. buildings. Exposure to the office sector for CPF Unitholders Merger Participants should consult their own independent who elect to retain their Cromwell Securities will increase professional tax adviser about the tax consequences for from 64% to 91% by value. If the office sector underperforms them if the Merger is implemented. relative to other property sectors, the performance of the Cromwell Properties may be relatively worse than the Tax consequences for Cromwell Securityholders will be performance of the CPF Properties and Cromwell Securities specific to their individual circumstances. may underperform other A-REITs or the wider market. CPF Unitholders should consult with their tax and/or other professional advisers in respect of the particular tax consequences of purchasing, owning or disposing of Cromwell Securities in light of their particular situation.
30 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 6. Information about CPF
In accordance with the responsibility statement included The global financial crisis had its beginnings in 2008 and in the Important Notices Section on page 1, CPF RE has by late that year it began to create pressure on tenants responsibility for preparing information contained in businesses, debt availability and property values. The Fund this Section other than the information about the Exhibition reduced distributions to 7 cents per unit in January 2009 Street Property and the TGA Property, which was provided when the head tenant at the Forum properties defaulted by Cromwell. on their lease due to financial difficulties. The limited It is important that you consider the risks that could affect monthly withdrawal facility was also suspended at this CPF as detailed in Section 10 on page 56, as well as the time due primarily to uncertainty over property valuations. potential benefits of the Merger. CPF RE also reduced the management fee from this date in proportion to the reduction in distributions and has In this Section, all references to a state of affairs are to be continued to do so until the present time. interpreted as existing at 30 June 2012, unless otherwise stated. There was a significant decrease in valuations for the Fund’s properties at 30 June 2009. Given the high gearing of the Fund, the decreases in valuations amplified the decrease 6.1. CPF Background in the NTA per CPF Unit. In August 2009, given the inability of the Fund to accept new applications, CPF RE suspended CPF was established in 2006 as an open ended, unlisted distributions in order to fund leasing costs and property property trust with the aim of delivering a stable, tax effective capital improvements, in particular in anticipation of the monthly distribution and capital growth from non-residential major tenant vacating the Fund’s largest property, the property assets. When CPF Units were first offered to the Exhibition Street Property. public, initial assets had been identified and the Fund aimed to increase diversification through acquiring additional In order to satisfy the bank covenants, the Fund sold assets properties. between March 2010 and November 2010, with the CPF Properties remaining the only properties owned by the Fund. In June 2006 Cromwell invested $20 million in the Fund and As part of this disposal programme, Cromwell acquired was issued 20 million units. It later increased this investment the Exhibition Street Property and the one third of the TGA by a further $10 million (10 million units) in December 2007. Property it did not already own from CPF in July 2010. The The first PDS for the Fund was issued in July 2006 with return to Cromwell for these two properties since acquisition 5 properties and an initial distribution of 8 cents per unit. and up to 30 June 2012 is shown below: Units were issued at $1.00 each until November 2007 when daily unit pricing commenced. Exhibition St TGA Cromwell also provided funding to assist CPF to acquire Property Property properties. The funding was provided by way of convertible $ $ financing units (CFU’s). The Fund purchased a further Purchase Price 90,200,000 25,000,000 7 assets up to December 2007, with a combination of new equity, bank debt and CFU’s. The CFU facility was drawn to Acquisition Costs 4,984,634 - a maximum of $74 million on September 2006 and reduced to $25 million by June 2008, when it was replaced by the Capital Improvements 33,243,505 68,092 Cromwell Property Loan. Lease Incentives 29,068,166 - A total of approximately $185 million in capital (including Cromwell’s investment) was raised in CPF between June Leasing Costs 3,367,517 - 2006 and January 2009 and approximately $13 million worth Total Costs 160,863,822 25,068,092 of redemptions were paid during this period. Current Valuation 170,000,000 23,333,333 The Fund paid redemptions from July 2007 to December 2008 pursuant to a limited monthly withdrawal facility, Increase/(Decrease) in Value 9,136,178 (1,734,758) which aimed to allow CPF Unitholders to withdraw all or part of their investment subject to certain limitations. Total Annualised Capital Return 2.9% -3.6% redemptions each month were limited to 0.5% of the net asset value of the Fund on the first Business Day of each month for that corresponding 1 month period. If the limit was Net Income since purchase 11,473,244 5,101,331 exceeded for that month then redemption requests could Annualised Income Return 3.7% 10.4% be paid in full or prorated at the discretion of CPF RE. CPF RE could also defer or suspend redemptions in exceptional Annualised Total Return 6.6% 6.9% circumstances. Such circumstances would include if allowing redemptions would disadvantage other CPF Following the sale of some properties and some evidence Unitholders or if they could result in breach of covenants of stability in valuations, distributions recommenced under the Bank Loan. in September 2010 at the rate of 2 cents per CPF Unit per annum.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 31 In November 2011 the major tenant at the Hurstville Property The CPF withdrawal price and NTA hit their maximum prices exercised an option, effectively extending their lease for of $0.99 and $0.82 respectively on December 2007. Since a further 5 years. that time they have generally trended downwards in line with In April 2012 CPF RE agreed terms with the provider of underlying valuations, with a significant drop in June 2009. the Bank Loan for an extension of that loan on substantially similar terms until June 2015. $1.10 Unit Price $1.00 In May 2012, the major tenant at the Smithfield Property NTA unexpectedly entered into voluntary administration and in $0.90 June they vacated the property. This resulted in a fall in $0.80 the Smithfield Property’s valuation and the need to suspend $0.70 distributions in July 2012 in order to ensure sufficient $0.60 working capital was available to provide for re-leasing costs $0.50 and associated property improvement works. $0.40 As a result of falls in the valuations of the Smithfield and $0.30 Woden Properties in June 2012, the LVR of the Bank Loan $0.20 increased to 67%. In June 2012, to avoid any breaches of $0.10 covenant as a result of the valuation falls, CPF RE negotiated $0.00 a temporary increase in the LVR covenant from 65% to Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Sep 08 Sep 09 Sep 10 Sep 11 70% for the period 30 June 2012 to 30 June 2013. In return, Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 the interest rate was increased by 0.15% pa for so long as the LVR exceeds 65%. The negotiations did not result in any other unusual or material obligations being imposed on CPF. The impact of the decline in valuations on the unit price and If the LVR is not reduced to 65% or lower by 30 June 2013, net assets can be generally apportioned between various the Fund would be in breach of its Bank Loan subject to any factors as follows: further negotiations between CPF RE and its lender. $1.00 –$0.21 $1.00 6.2. CPF performance –$0.04 The performance of the Fund since the onset of the global $0.80 –$0.53 financial crisis in 2008 has been very disappointing. In essence, the Fund has been impacted by three significant $0.60 factors: • the impact of global economic conditions on property $0.40 valuations in Australia. The weighted average fall in value for the CPF Properties from their purchase date to –$0.07 $0.20 $0.16 the later of their sale date or 30 June 2012 has been 21% of the initial purchase price plus improvements; $0.00 • the gearing in the Fund, which was designed to magnify Issue Acquisition Equity Valuation Borrowing NTA any increases in value of the properties held by the Fund, Price Costs Issue Costs Decline Costs has also magnified the impact of falls in the values of the CPF Properties; and The Fund’s gearing has increased the impact of each of • the timing of the Fund’s inception. Since the Fund was the above factors by a multiple of approximately 3 times. only established in 2006, it did not have sufficient time to For example, the net fall in valuations for the CPF Properties recover all of the initial costs of acquiring the properties, was approximately 21%. But, as a result of gearing, this net such as stamp duty. fall in valuations lead to a $0.53 or 53% fall in the Fund’s Upon completion of the issue of the initial capital in unit price. November 2007, the Fund had a withdrawal price of $0.99 and an NTA per CPF Unit of $0.80. The difference between the two values is generally attributable to the costs of acquisition of the Fund’s properties, which were to be written off over time to ensure the cost was attributed across all CPF Unitholders.
32 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 6.3. CPF Properties The remaining CPF Properties are located predominantly in NSW and ACT. All of the CPF Properties have been independently valued between December 2011 and June 2012. The following table shows the current valuations of CPF Properties as well as the date of the valuation, the capitalisation rate adopted in the valuation (where applicable) and whether it is an internal or external valuation.
Property State Sector Valuation Date Cap Rate Value Hurstville Property NSW Office $34.5 m June 12 9.50% Internal* Prospect Property NSW Retail $38.5 m June 12 10.75% External Woden Property ACT Office $73.0 m June 12 9.50% External Smithfield Property NSW Industrial $19.7 m June 12 10.25% External Edinburgh Park Property SA Industrial $2.7 m June 12 N/A Internal** Total $168.4 m
* The most recent independent valuation of the Hurstville Property was $34,500,000 and the valuation was dated 31 December 2011. ** The most recent independent valuation of the Edinburgh Park Property was $2,700,000 and the valuation was dated 31 December 2011.
6.3.1. Key Property Statistics Key portfolio statistics for CPF Properties are as follows: The CPF Properties are currently 87.9% occupied (by gross income), with significant vacancy in the Smithfield Property 30 Jun 12 and, to a lesser extent, the Prospect Property. The CPF Portfolio Value $168.4 million Properties have a 3.7 year WALE, with minimal lease expiry in the next 3 financial years, and 71% of lease income Number of Properties 5 expiring in FY16 and after. Occupancy 87.9% Property Occupancy % WALE WALE 3.7 years by Gross Income Weighted Average Capitalisation Rate 9.88% Hurstville Property 95.3% 4.3 yrs Net Lettable Area 82,297 m2 Prospect Property 86.5% 3.3 yrs Income from Government and Listed tenants 73.7% Woden Property 100.0% 4.0 yrs Smithfield Property 30.2% 0.5 yrs The portfolio is predominantly located in NSW and ACT: Edinburgh Park Property 100.0% 1.0 yrs
NSW 55.0% PORTFOLIO TOTAL 87.9% 3.7 yrs
SA 1.6% Percentage by Gross Income ACT 43.3% 50% 45%
40%
30% 26% The majority of the portfolio is commercial office property, with smaller exposure to the retail and industrial sectors: 20% 12% 10% 9% Retail 22.9% 5% 2% 0 Industrial 13.3% Vacant FY13 FY14 FY15 FY16 Thereafter Financial Year
Commercial 63.8%
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 33 CPF Properties
Hurstville Property This property is located in Hurstville’s commercial market, which is a sub-regional centre within the middle ring of Sydney’s Southern/South Western suburbs, situated approximately 20 km from Sydney CBD and is classed as a significant Commercial Centre.
43 Bridge Street, External $34.5 m Address Hurstville, NSW valuation (Dec 11) Sector Commercial Book value $34.5 m Land area 4,126 sqm Occupancy 95.3% Lettable area 9,799 sqm Cap rate 9.50% Acquisition date July 2006 WALE 4.3 years Environmental Ratings State Property Major tenant NABERS Energy 4.5 Stars Authority of NSW NABERS Water 3.5 Stars
Prospect Property This major homemaker centre is located approximately 30 km West of Sydney’s CBD. The centre provides excellent accessibility being adjacent to the M4 motorway within the suburb of Prospect, and has a main frontage to Stoddard Road.
Homebase, Prospect, External $38.5 m Address NSW valuation (June 12) Sector Retail Book value $38.5 m Land area 6.55 ha Lettable area 25,874 sqm Occupancy 86.5% Acquisition date July 2006 Fantastic Furniture, Cap rate 10.75% The Good Guys, Nick Major tenant Scali Sofas to Go, Beacon Lighting WALE 3.3 years
34 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Woden Property With 22 commercial office floors and ground floor retail, Lovett Tower is Canberra’s tallest building and is 99% leased to the Department of Veteran Affairs until 2017.
13 Keltie Street, External $73.0 m Address Woden, ACT valuation (Jun 12) Sector Commercial Book value $73.0 m Land area 1,258 sqm Occupancy 100% Lettable area 20,540 sqm Cap rate 9.50% Acquisition date Dec 2006 WALE 4.0 years Environmental Ratings Department Major tenant NABERS Energy 4.0 Stars of Veteran Affairs NABERS Water 5.0 Stars
Smithfield Property Located in a well established and popular industrial area in Sydney’s South Western suburbs, this industrial complex presents multiple opportunities for redevelopment while delivering ongoing income.
28-54 Percival Rd, External $19.7 m Address Smithfield, NSW valuation (Jun 12) Sector Industrial Book value $19.7 m Land area 55,170 sqm Occupancy 30.2% Lettable area 26,084 sqm Acquisition date May 2007 Cap rate 10.25% Cargo Logistics, Major tenants Microbial, Toll WALE 0.5 years
Edinburgh Park Property The property is located 24 km north of Adelaide CBD in an emerging industrial area.
Sturton Road, External $2.70 m Address Edinburgh Park, SA valuation (31 Dec 11) Sector Industrial Book value $2.70 m Land area 4.50 ha Occupancy N/A Lettable area vacant land Cap rate N/A Acquisition date Oct 2007 Major tenant N/A WALE Vacant land
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 35 Approximately 74% of income is derived from government The Cromwell Industrial Land Loan, for approximately and listed tenants. $4.1 million, funded the Industrial Land acquisitions. This facility is repayable on demand, but Cromwell will not call for repayment unless or until CPF has sold or otherwise Private Company 26.3% dealt with the Industrial Land. The LVR on the Bank Loan is required to be 70% or below, Listed Company/ 9.4% reducing to 65% or below by 30 June 2013. At 30 June Subsidary 2012, the actual LVR for the Bank Loan was 66.7%, based on the most recent independent valuations. If the LVR is not reduced to 65% or lower by 30 June 2013, the Fund Government 64.3% would be in breach of its Bank Loan, subject to any further Authority negotiations between CPF RE and its lender. Interest payable on the Bank Loan and the Cromwell Loans is made up of two components, the market interest rate and the facility interest margin. The market rate can be fixed 6.4. CPF Loans or otherwise hedged for a period of time. The market rate on the Fund’s current borrowings is 66% hedged for FY13. Key statistics relating to CPF loans as at 30 June 2012 are as Given the current position of the Fund and the associated follows: uncertainty, it is not considered prudent or cost effective to hedge market interest rates any further. Bank Loan $112,250,000 The current weighted average margin across all loans is Total Loans $136,112,000 2.4%. The facility interest rate margin is generally set on each loan for the term of that loan by the lender. However LVR (Bank Loan only) 67% the margin can change during the loan period term if other Gearing ratio (total debt/total assets) 79% loan terms are changed or renegotiated, or if the loan is in default. For example, as a result of the most recent Weighted average debt expiry 2.5 years negotiated increase in LVR covenant from 65% to 70% on the Bank Loan, the interest rate margin was increased by 0.15% Weighted average interest hedging 1.9 years for as long as the LVR remains above 65%. Interest cover ratio (FY12) actual 1.5 times The weighted average total interest rate at 30 June 2012 Interest cover ratio (FY13) forecast 1.5 times (including hedged and unhedged debt) was 7.07%.
The Fund has 3 loans at 30 June 2012 as summarised below: 6.5. Fees payable to CPF RE CPF RE is entitled to certain fees for managing CPF and to Facility Security Drawn Debt Expiry Date recover expenses incurred in managing CPF and performing ($’000) its obligations and exercising its powers under the CPF Bank Loan CPF Properties $112,250 Jun 2015 Constitution. All amounts below are exclusive of recoverable GST. CPF RE is not entitled to, and will not charge any fees Cromwell Property in relation to the Merger, other than recovery of any costs to Loan Unsecured $19,800 Sep 2012 which it is entitled. Cromwell Industrial Land Loan Unsecured $4,062 On demand 6.5.1. Management costs (a) Base Annual Management Fee Total $136,112 The CPF Constitution allows CPF RE to charge an ongoing annual base management fee of up to 0.75% of The Bank Loan is currently drawn to $112.25 million, was CPF’s average gross asset value, although it has never recently renewed for a further 3 year term and expires in charged more than 0.55% of CPF’s average gross asset June 2015. Security for the Bank Loan is a first mortgage value. over the CPF Properties. Since distributions were first reduced in January 2009, The Cromwell Property Loan, for $19.8 million, represents CPF RE has charged a reduced management fee the remainder of the original funding put in place with calculated by dividing the amount of the annualised Cromwell when the CPF was established. The Cromwell distributions each month (in cents per unit) by the Property Loan is unsecured and expires in September 2012 original distribution amount of 8 cents per unit and . multiplying the result by 0.55%. For periods when CPF has paid no distributions, no management fee has been charged. The average annual management fee from inception of the Fund to 30 June 2012 has been 0.33% of gross assets.
36 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting CPF RE intends to continue with this policy of only • costs, charges and expense and disbursements paid or taking a management fee in proportion to distributions payable to the Custodian; and for FY13, but may review this decision at any time. • the fees and expenses of the compliance committee of (b) Annual Administration Costs the CPF. CPF will incur administration costs such as audit 6.5.4. Commissions to Financial Advisors costs, custodial fees, compliance committee costs, accounting, tax and legal advice, bank charges, printing Currently CPF RE pays trail commissions to financial and stationery costs. These costs have averaged 0.23% advisors. The level of trail commission is generally 0.25% pa of average gross assets over the previous 2 Financial of the current value of net assets introduced by an advisor Years. (eg $25 pa for every $10,000 net asset value). If the Merger is implemented CPF RE will make a one off payment to all (c) Acquisition Fee advisors currently receiving trail commissions from CPF The CPF Constitution allows CPF RE or its related RE. The payment will be equal to the trail commission that entities to charge an acquisition fee of 3% of the would have been paid for the period from the Implementation acquisition price of any property asset. Date until 30 June 2013 if the Merger was not implemented (d) Bonus Performance Fee (assuming the value of their client’s investment remains at its 30 June 2012 value). Following this one off payment, no CPF RE is entitled to a performance fee of 20% of the further trail commission payments will be made. out performance over an acceptable property industry benchmark. This amount is capped at 1% of the average value of the property assets in any 12 month period. 6.6. Cromwell Directors Given the performance of the Fund to date, this fee is CPSL is the CPF RE and the CDPT RE. The board of directors unlikely to be charged in the future. of CPSL is the same as the board of directors of CCL and (e) Removal Fee are referred to as the Cromwell Directors in this Explanatory This is payable to CPF RE upon its removal as Memorandum. Information on the Cromwell Directors is at responsible entity of the Fund and would be charged at Section 7 on page 38. 3% of the gross asset value of the Fund. This fee can be The responsible entity of a registered managed investment partially or fully waived at CPF RE’s discretion. This fee scheme has a duty to act in the best interests of its investors. will not be chargeable as a result of the Merger. Therefore, CPSL has to act in the best interests of both CPF (f) Debt Arrangement Fee Unitholders and Cromwell Securityholders. As a result, it has a conflict of interest when deciding whether to enter into the CPF RE may charge a fee up to 0.35% of the amount of Merger on behalf of Cromwell Securityholders and whether the debt facility arranged. This fee has not been charged to recommend the Merger to CPF Unitholders as being in in relation to the Cromwell Loans. their best interests. 6.5.2. Other fees and costs incurred in the normal course of CPSL has taken steps to manage this conflict and ensure CPF’s business that it is acting in the best interests of both CPF Unitholders and Cromwell Securityholders. For example, separate CPF RE or a related party may charge for services provided Cromwell management teams were responsible for to CPF above and beyond managing the Fund. These fees are evaluating whether or not Cromwell should enter into the charged at commercial market rates. The services that may Merger, making the appropriate recommendation to the be provided for a fee include: Cromwell Directors and for evaluating the Merger and • property management fees; providing necessary material to the Independent Directors for them to form an opinion as to whether or not they should • leasing fees; recommend the Merger to CPF Unitholders. • project management fees; and Further, an Independent Expert has been asked to consider • accounting service fees. the Merger and provide a report to the Independent Directors 6.5.3. Expenses and CPF Unitholders setting out its view on whether or not the Merger is fair and reasonable and whether or In addition to the fees noted above, CPF RE is entitled under not accepting the Merger is in the best interests of CPF the CPF Constitution to be reimbursed for all expenses Unitholders. it may incur in connection with CPF or in performing its obligations or exercising its powers under the CPF Constitution. These expenses include but are not limited to the following: • costs, charges and expenses of maintaining and improving any of the CPF Properties; • costs of convening and holding any meeting of CPF Unitholders; • expenses incurred in connection with the keeping and maintaining of accounting and financial records and registers including the register of investors;
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 37 7. Information about Cromwell
In accordance with the responsibility statement included in Cromwell is a stapled entity comprising CDPT, which owns the Important Notices Section on page 1 of this Explanatory the Cromwell Properties and CCL, the operating business Memorandum, Cromwell has sole responsibility for which undertakes the property and funds management preparing information contained in this Section, subject activities. At 30 June 2012 Cromwell had approximately to CPF RE taking sole responsibility for the information $2.4 billion assets under management, including the that it has provided to Cromwell for the purposes of Cromwell Properties, which were valued at over $1.7 billion. preparing information on Combined Cromwell following It managed a further $0.7 billion in total assets, including the implementation of the Merger. CPF. It is important that you consider the Risk Factors that could affect In FY12, over 95% of Cromwell’s Operating Earnings were Cromwell as detailed in Section 5 on page 30 and Section 10 on derived from the Cromwell Properties, with the balance page 56 as well as the potential benefits of the Merger. from property and funds management activities. In this Section all references to a state of affairs are to In the remainder of this Section, references to Cromwell be interpreted as existing at the date of this Explanatory include references to Combined Cromwell unless otherwise Memorandum, unless otherwise stated. specified or made clear by the context.
7.1. Cromwell Background 7.2. Benefits of an investment Although CCL has been listed on the ASX since 1971, in Combined Cromwell two important transactions have shaped the history of Cromwell Securities will provide exposure to: Cromwell and the current structure of the business. First, the involvement of the existing management team began • a larger property portfolio compared to the CPF in 1998. At that time Cromwell was operating as a property Properties with a greater geographic diversification, fund manager and developer but did not have any significant greater number of properties and tenants, a longer recurring earnings and did not own any investment WALE and a higher exposure to the office sector; properties. • the wider business activities of Cromwell including property and funds management and the potential for Since 1999 CCL has formed a number of property some development activity in the future; syndicates, trusts and other property related investments’ and has raised over $850 million for 15 different funds and • a listed security on the ASX with potential for price other offerings including CDPT. These funds acquired assets fluctuations and greater volatility; valued at over $1.7 billion during this period. • liquidity by way of the ability to sell Cromwell Securities The second key transaction occurred in 2006 when CCL on the ASX; proposed a merger of 6 unlisted property funds (including • lower gearing than CPF; and CDPT) and a stapling of the merged funds to CCL. This • continued distributions, albeit at a lower rate than transaction was overwhelmingly approved by unitholders previously paid to CPF Unitholders. Cromwell in all funds and CCL Shareholders, and was completed in distributions are paid quarterly and there will be some December 2006. The resulting stapled structure formed the initial timing differences as a result of a greater time Cromwell Property Group. period between the end of each distribution period and Today, Cromwell is an internally managed A-REIT and the payment date. property fund manager listed on the ASX (ASX code: CMW).
CCL CDPT Fund Management Property Portfolio and Other Fee Income Income
Cromwell Property Group Stapled Security (ASX: CMW)
CCL Share CDPT Unit
Dividends Distributions (partially franked) (partially tax deferred)
38 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 7. Information about Cromwell
7.3. Cromwell Strategy 7.3.3. Distribution Policy Cromwell pays distributions quarterly in arrears. These 7.3.1. Investment Strategy distributions are sourced from Operating Earnings and Cromwell targets a total annualised return on its property Cromwell aims to pay out 90-95% of Operating Earnings as portfolio of 12% from a core investment portfolio leased distributions. predominately to State and Federal government tenants and Cromwell maintains a dividend reinvestment plan where other entities listed on recognised securities exchanges. Cromwell Securityholders can elect to participate and The Combined Properties are currently over 91% weighted to have their distributions reinvested for additional Cromwell the office sector with a small exposure to industrial property Securities. The dividend reinvestment price under the plan is assets and minimal exposure to retail and development the market price, which is the average of the daily VWAP of assets because Cromwell believes the office sector will Cromwell Securities traded on the ASX during the 10 trading provide the highest total returns over the next 3-5 years. days immediately prior to the relevant plan record date to Cromwell currently has no exposure to residential or which the distribution relates, less any discount. Details of retirement assets. any discount are announced at the time of each distribution Cromwell is invested mostly in defensive, high quality office announcement. assets in CBD and core fringe markets. The Cromwell Properties are diversified by geography, tenant and lease 7.3.4. Valuation Policy expiry profile. The Combined Properties will be made up of Cromwell Properties are generally independently valued at 27 quality property assets spread across 6 Australian States least once in every Financial Year, although exceptions are and Territories. The Cromwell Properties are 95.6% leased made from time to time. with one of the longest WALE’s in the A-REIT sector at 6.0 years. Valuations are undertaken by a registered valuer with not less than five years relevant experience and based on Each year, Cromwell works to strengthen the property the price at which the property might be reasonably expected portfolio by purchasing assets that offer the potential to be sold at the date of the valuation, assuming: for superior returns through active asset management, disposing of any assets which are not expected to continue (a) a willing, but not anxious buyer and seller; to deliver return targets and enhancing properties where (b) a reasonable period within which to negotiate the sale, additional value can be created through capital expenditure. having regard to the nature and situation of the property and the state of the market for property of the same 7.3.2. Intentions for CPF kind; Cromwell’s intention is to hold the CPF Properties. Cromwell (c) that the property was reasonably exposed to that will adopt appropriate strategies to reduce existing vacancies market; and where possible increase the WALE of each CPF Property. (d) that no account is taken of the value or other advantage Since CPF would be wholly owned by Cromwell, it would or benefit additional to market value, to the buyer be de-registered as a managed investment scheme. As a incidental to ownership of the property being valued; result, CPF will no longer have its financial reports audited (e) that Cromwell has sufficient resources to allow and CPF Unitholders will not receive any specific reporting a reasonable period for the exposure of the property including financial reports, quarterly newsletters or annual for sale; taxation statements on CPF and CPF Properties. Instead, investors will receive communications from Cromwell which (f) that Cromwell has sufficient resources to negotiate an will include: agreement for the sale of the property; and • quarterly distribution statements; (g) the valuation is based on all the information that a valuer needs for the purposes of the valuation being • quarterly securityholder updates; made available by or on behalf of Cromwell. • annual financial reports; and In addition, Cromwell will not instruct a registered valuer • annual taxation statements. to prepare an independent valuation for more than two consecutive years on the same property. Valuers are instructed to undertake their valuation in accordance with industry standards and to outline their valuation methodology within the valuation report. At the end of each six monthly financial reporting period, the valuation of each Cromwell Property is reviewed by the Cromwell Directors and updated if necessary.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 39 7.3.5. Gearing Policy CMW Annualised Performance Returns to 30 June 2012
Cromwell aims to maintain gearing in a range of 35-55%, 35 with an expectation that it will be towards the bottom of 31.0% 30 29.3% this range at the peak of the property valuation cycle and at 27.7% 25 23.9% the highest end of the range when valuations are at a low 21.5% point. Cromwell measures gearing as (total borrowings less 20
cash) / (total assets less cash) for this purpose. However, 15 12.7% 11.0% 12.2% in this Explanatory Memorandum, gearing is calculated in 10 9.9% 9.3% accordance with Regulatory Guide 46, which defines it as 5 1.7% total borrowings/total assets. The difference is not expected 0.1% Annualised Return 0 to be material. -1.1% -5 -3.8% 7.3.6. Fees and Expenses -10 -15 -12.6% CDPT RE is entitled to certain fees for managing CDPT and 1 year 3 year 5 year 7 year 10 year to recover expenses incurred in managing CDPT, performing its obligations and exercising its powers under the CDPT CMW Return constitution. However, as these fees are charged by CPSL S&P/ASX A-REIT 300 Accumulation Index or another company owned by Cromwell, they represent Excess Performance an internal charge which is eliminated when preparing the financial reports of Cromwell. Disclosure obligations require these fees to be set out in a prescribed form and further Secondly, Cromwell measures its effectiveness as a property information in relation to these fees is available in Annexure manager by comparing total annual returns from the entire 4 on page 157. managed property portfolio (including assets in managed funds) against the IPD Australian All-Fund Universe. This index is considered an appropriate benchmark because 7.4. Cromwell Performance it is a broad-based property index which measures total returns from a $134 billion portfolio of investment properties Cromwell places significant importance on long term managed by over 70 managers including the majority of property and investment performance. Although past larger A-REITs and property fund managers. performance cannot be taken as an indication of future performance, sustained performance over a long period Cromwell aims to outperform this index over rolling 3, could be said to be an indication of a successful investment 5 and 10 year periods. As shown below, Cromwell has strategy. outperformed this index over these periods, with excess returns of 2.3%, 1.9% and 1.6% above the index for 3, 5 and Cromwell measures performance in two ways. First, 10 years respectively. Cromwell has also outperformed Cromwell measures returns to securityholders by comparing the index in 10 of the last 12 years. total returns from Cromwell Securities to the S&P/ASX A-REIT 300 Accumulation Index. This index is considered to be an appropriate benchmark as it broadly captures the total CMW Annualised Performance against PCA/IPD performance return performance of all A-REITs in the S&P ASX 300 index, benchmarks weighted by market capitalisation. 14%
Cromwell aims to outperform this index over rolling 3 and 12.1% 11.6% 12.0% 5 year periods and therefore deliver higher than average 12% 9.9% returns over these periods. The choice of these time periods 10.0% 10.0% 10% 9.4% reflects Cromwell’s focus on returns over the medium to 8.4% 8% long term. 7.1% 6.5% As shown in the following charts, Cromwell has significantly 6% outperformed the index over these periods, with excess returns of 9.3% and 12.7% per annum above the index for Annualised Return 4% 2.3% 3 and 5 years respectively. Cromwell has also substantially 2.2% 2.0% 2% 1.9% outperformed over a 10 year period. However, part of this 1.6% time relates to the period prior to the stapling of CCL and 0% CDPT and is therefore not directly comparable. 1 year 3 year 5 year 10 year 12 year
Cromwell Managed Portfolio IPD Australian All-fund Universe Excess Performance
40 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 7.5. Cromwell Property Portfolio If the Merger is implemented, the Combined Properties will consist of 27 property assets spread across 6 Australian States and Territories. The Cromwell Properties are predominantly made up of commercial office properties with a focus on maximising lease term, tenant and asset quality. The following table shows the current valuations of the Combined Properties as well as the date of the valuation, the capitalisation rate adopted in the valuation (where applicable) and whether it is an internal or an external valuation.
Date of Last External / External Building State Sector Cap Rate Valuation Internal Valuation Qantas Global Headquarters NSW Office 7.25% 198,800,000 Internal 26/10/2011 HQ North Tower QLD Office 8.13% 194,000,000 External 30/06/2012 Tuggeranong Office Park ACT Office 8.50% 173,000,000 External 30/06/2012 700 Collins Street VIC Office 7.50% 172,400,000 Internal 31/12/2011 Exhibition Street Property VIC Office 7.50% 170,000,000 Internal 2/11/2011 475 Victoria Avenue NSW Office 8.25% 135,000,000 External 30/06/2012 380 Latrobe Street VIC Office 8.00% 107,000,000 External 30/06/2012 200 Mary Street QLD Office 8.25% 87,000,000 External 30/06/2012 Synergy QLD Office 8.75% 73,000,000 Internal 1/10/2011 Woden Property ACT Office 9.50% 73,000,000 External 30/06/2012 TGA Property ACT Office 9.50% 70,000,000 External 30/06/2012 Bundall Corporate Centre QLD Office 11.00% 65,300,000 Internal 20/12/2011 101 Grenfell Street SA Office 8.75% 43,200,000 Internal 31/12/2011 Prospect Property NSW Retail 10.75% 38,500,000 External 30/06/2012 Hurstville Property NSW Office 9.50% 34,500,000 Internal 31/12/2011 Brooklyn Woolstore VIC Industrial 9.50% 34,400,000 Internal 31/12/2011 19 National Circuit ACT Office 8.50% 32,000,000 External 30/06/2012 100 Waymouth Street SA Office 8.00% 32,000,000 Internal 31/12/2011 Oracle Building ACT Office 10.00% 28,500,000 External 30/06/2012 NQX Distribution Centre QLD Industrial 9.25% 26,500,000 External 30/06/2011 Terrace Office Park QLD Office 8.50% 26,500,000 Internal 31/12/2011 Smithfield Property NSW Industrial 10.25% 19,700,000 External 30/06/2012 Vodafone Call Centre TAS Office 10.00% 15,300,000 Internal 31/12/2011 Gillman Woolstore SA Industrial 9.25% 15,000,000 Internal 31/12/2011 Regent Cinema Centre NSW Retail 9.00% 13,400,000 Internal 31/12/2011 Village Cinemas VIC Retail 9.25% 12,100,000 Internal 31/12/2011 Edinburgh Park Property SA Industrial N/A 2,700,000 Internal 31/12/2011 PORTFOLIO 8.42% 1,892,800,000
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 41 7.5.1. Key Property Statistics Key portfolio statistics for the Combined Properties are as Percentage follows: by Gross Income 70% 30 Jun 12 60% 60%
Portfolio value $1.892 billion 50% Number of properties 27 40% Occupancy 95.6% 30% 17% 20% WALE 6.0 years 10% 7% 7% 4% 5% Weighted average capitalisation rate 8.42% 0 Net lettable area 587,684 m2 Vacant FY13 FY14 FY15 FY16 Thereafter Financial Year Income from Government and listed tenants 83.3% Approximately 41% of income is derived from government The Combined Properties will include a greater number of or goverment owned authorities. A further 42% of income properties and will be more diversified geographically than is divided from entities listed on a recognised securities the CPF Properties, with significant weightings to NSW, VIC, exchange. QLD and ACT:
Listed Company/ 41.9% VIC 26.2% Subsidary TAS 0.8%
SA 4.9% Private Company 16.7%
Government 41.4% Authority
QLD 25.0% Further information on the Cromwell Properties is in the NSW 23.2% Cromwell Property Portfolio booklet which is available from www.cromwell.com.au/properties ACT 19.9%
7.6. Funds Management Activities The majority of the Combined Properties will consist of Cromwell, through wholly owned subsidiaries CPSL and commercial office property, with only a very small exposure Cromwell Funds Management Limited, is licensed to to the retail and industrial sectors, and will therefore be less manage direct property, mortgage and equities funds. Since diversified by sector than the CPF Properties. the involvement of current management in 1998, Cromwell has managed unlisted direct property funds, raising over $850 million and acquiring property assets valued in excess COMMERCIAL 91.4% of $1.7 billion. Cromwell also managed mortgage funds between 2000 and INDUSTRIAL 5.2% 2005, for which over $40 million was raised, and undertook
RETAIL 3.4% other offers (primarily debentures and other similar investments) to raise over $100 million. Additionally Cromwell manages over $200 million in listed property securities through its 50% ownership in Phoenix Portfolios Pty Ltd, an investment manager specialising in managing property securities for wholesale investors. The Combined Properties will be 95.6% occupied, with Should the Merger be implemented, the funds management significant vacancy in the Smithfield Property and the division of Cromwell will be only slightly impacted. CPSL is property at Waymouth Street, Adelaide which is currently the CPF RE and receives fees for managing CPF, but these undergoing a $12 million refurbishment. The Combined are not material (for more information see Section 6 on page Properties will have a 6.0 year WALE, with minimal lease 31). expiry in the next 3 Financial Years and 17% of lease income expiring in FY16.
42 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting The current funds management activities of Cromwell are S&P/ASX A-REIT 300 Accumulation Index which calculates summarised as follows: returns from all A-REITs included in the S&P/ASX 300 Index. The performance history of all funds managed by Cromwell Fund Investor Total Number of Start End Ongoing is shown in the table below. For those Cromwell funds that Assets Properties Date Date Fees* were merged in December 2006 to form CDPT, performance Cromwell has been measured up to that date. Property Fund Retail $171m 5 2006 N/A 0.60% All Cromwell funds with the exception of CPF have Cromwell outperformed their benchmark over the period each fund Riverpark Trust Retail $195m 1 2009 2016 0.60% operated.
Cromwell Ipswich Fund Inception Total Bench- Rel. City Heart Trust Retail $30m 1 2011 2017 0.50% Date Returns mark Perfor- (p.a.) (p.a) mance Cromwell Phoenix Property Terrace Office Planned Securities Fund Retail $23m N/A 2008 N/A 0.82% Investment 3 Jun-99 20.80% 11.70% 9.10% Phoenix Riverfront Planned Investment 3 Dec-99 9.20% 8.10% 1.10% Mandates Wholesale $186m N/A 2008 N/A variable Planned Investment No. 3 3 Sep-00 17.60% 12.00% 5.60% * Fees quoted are as a percentage of total assets. Planned Investment No. 4 3 Nov-00 17.90% 7.80% 10.10%
Profiles of the retail funds listed above (excluding CPF) are Diversified Property Trust 3 Feb-03 18.90% 13.70% 5.20% below. Cromwell Phoenix Property Cromwell Riverpark Trust Securities Fund 2 Apr-08 0.78% -8.35% 9.13% The Cromwell Riverpark Trust was established in 2009 and Goulburn Street Planned owns a single office asset in Brisbane, currently valued Investments 3 May-02 18.20% 13.10% 5.10% at $192 million. The Trust is currently distributing 9.0% per annum, paid monthly. Its NTA per unit has risen from Mary Street Planned 3 the pro-forma $0.90 at the start day of the Trust to $1.04 Investment Jun-01 28.40% 12.30% 16.10% as at 30 June 2012. Since inception the Trust has delivered Cromwell Property Fund 1 Jul-06 -9.43% 7.60% -17.03% a total annual return of approximately 10%. Cromwell Riverpark Trust 1 Jul-09 9.97% 5.76% 4.21% Cromwell Ipswich City Heart Trust The Cromwell Ipswich City Heart Trust was established in Northbourne Planned 3 December 2011 and owns the Ipswich City Heart building Investment Nov-01 16.20% 12.70% 3.50% in Queensland, which is currently under construction. TGA Planned Investment 3 Nov-01 65.10% 12.70% 52.40% The building is valued on an “as if complete” basis at $93 million and the Trust is currently distributing 8.0% Cromwell Ipswich City Heart 1 per annum, paid monthly. The Trust is currently open for Trust Dec-11 7.75% 7.47% 0.28% investment and expects to have issued units valued at 1. PCA/IPD Pooled Property Fund Index – Unlisted Retail approximately $49 million by December 2012. 2. S&P/ASX A-REIT 300 Accumulation Index Cromwell Phoenix Property Securities Fund 3. Mercer Unlisted Property Fund Index The Cromwell Phoenix Property Securities Fund provides its unitholders with a diversified exposure to a broad range of 7.7. Cromwell Debt Facilities ASX-listed property and property related securities. The Fund aims to provide its unitholders with a total return in excess of Key statistics related to Cromwell borrowings at 30 June the S&P/ASX 300 AREIT Accumulation Index. The Fund has 2012 were as follows: consistently out performed this index since inception. Total Loans (‘000) 1,080,801 Managed Property Funds Performance History Gearing ratio 54.0% Various benchmarks have been used to compare the performance of Cromwell funds. All unlisted direct Weighted average debt expiry 2.5 years property funds which commenced prior to 2006 have been measured against the Mercer Unlisted Property Fund Weighted average interest hedging 2.5 years Index. This index calculated the post-fee total returns from Interest cover ratio (FY12) actual 2.2 a range of Australian unlisted property funds. In 2009 this index was discontinued. Unlisted property funds which Interest cover ratio (FY13) forecast 2.3 commenced after 2006 have been measured against the PCA/IPD Australian Pooled Property Funds Index – Unlisted Retail, which calculates post-fee total returns from over 40 unlisted property funds managed by over 15 managers. The Cromwell Phoenix Property Securities Fund, which invests in Australian listed property securities, is measured against the
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 43 Combined Cromwell will have 8 loans which are summarised • expected operational synergies through more efficient below: management, lower costs and the ability to potentially reduce interest costs through a partial repayment of Facility Security Drawn Debt Expiry Date the Bank Loan; ($’000) • Cromwell will assume 100% control of the CPF Syndicate Remaining Cromwell Properties and will be able to make investment and facility 1 Properties 376,173 May 2014 asset management decisions and provide any required funding to achieve the best long term returns from Combined TGA Property, Exhibition the CPF Properties; and facility 1 Street Property, Synergy & 200 Mary Street 231,373 Jul 2015 • Cromwell expects to benefit from being seen to provide a solution for what has been Cromwell’s poorest Combined TGA Property, Exhibition performing managed fund. facility 2 Street Property, Synergy Repaid & 200 Mary Street 13,913 July 2012 7.9. Capital Structure HQ North facility HQ North Tower 120,700 Dec 2014 At the date of this Explanatory Memorandum there were CPF Bank Loan CPF Properties 112,250 Jun 2015 1,172,569,708 Cromwell Securities on issue. If the Merger is implemented, approximately 32,392,216 Cromwell Securities Tuggeranong Tuggeranong Office Park will be issued to the Merger Participants. Tranche 1 107,916 Jul 2015 This means that if the Merger is implemented as at Tuggeranong N/A the Implementation Date, there will be approximately Tranche 2 3,320 Jul 2013 1,206,000,000 Cromwell Securities on issue. Qantas facility Qantas Global At the date of this Explanatory Memorandum, Cromwell Headquarters 80,240 Dec 2014 has two substantial securityholders (being securityholders Bundall facility Bundall Corporate who hold in excess of 5% of the Cromwell Securities Centre 34,916 Dec 2014 on issue). They are the Redefine Property Group with approximately 27% (falling to approximately 26% Total $1,080,801 if the Merger is implemented) and Coronation Funds Management with approximately 5%.
Interest payable on Cromwell’s loans is made up of two The Cromwell Securities (and performance rights) components, the market interest rate and the loan margin held by Cromwell Directors are set out in Section 8 on rate. The market rate can be fixed or otherwise hedged for a page 48. Further information about Cromwell’s top twenty period of time. The market rate on Cromwell’s loans is 92% securityholders is available in Cromwell’s 2012 financial hedged for FY13. report on Cromwell’s website. The current weighted average margin rate across all Cromwell’s loans is 2.06%. The margin rate is generally set 7.10. Corporate governance on each loan by the lender for the term of the loan. However, the margin rate can change during the loan term if other The Cromwell Directors are committed to corporate loan terms are changed or renegotiated, or if the loan is in governance principles which are appropriate to the size and default. scale of its business. Various corporate governance policies and procedures have been implemented as a result. The The weighted average total interest rate at 30 June 2012 main corporate governance policies and procedures are (including hedged and unhedged debt) was 6.89%. available on Cromwell’s website at www.cromwell.com.au/ shareholders/corporate-governance. 7.8. Benefits to Cromwell of the Merger 7.10.1. Cromwell Directors If approved, the Merger is expected to deliver both qualitative and quantitative benefits to Cromwell. These include: Below is a brief profile on each of the Cromwell Directors: • increases in the contribution of recurring income and Mr Geoffrey Levy (AO) – Chairman diversity of the Combined Properties with the addition of Mr Levy has extensive public company executive and $168 million of investment properties; directorship experience and is the former Chief Executive • lower transaction costs for the acquisition of the CPF Officer and current Deputy Chairman of Investec Bank Properties via an efficient trust scheme process rather (Australia) Ltd. He is currently Chairman of Speciality than acquiring the CPF Properties in the direct property Fashion Group Limited, Investec Equity Investments Limited market; and Monash Private Capital. He has also been appointed • the CPF Properties will have higher income as a by the NSW State Government to chair its Property Asset percentage of current valuations than the existing Utilisation Taskforce. Geoff was appointed an Officer in Cromwell Properties although a slightly shorter WALE; the Order of Australia in the Queen’s Birthday Honours List in June 2005.
44 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Mr Robert Pullar – Non-Executive Director Mr Paul Weightman – Chief Executive Officer Mr Pullar is a Director of the Brisbane based property Mr Weightman practised as a solicitor for more than development company operating in Australia and Asia, 20 years, and holds degrees in commerce and law. He Citimark Properties. He was previously a partner with a mid- has extensive experience in property development and tiered chartered accounting firm, specialising in property investment, financial structuring, public listings, mergers investment, taxation and corporate reorganisation. Mr Pullar and acquisitions, revenue matters and joint ventures. Mr is a member of the Institute of Chartered Accountants and Weightman was Cromwell’s Executive Chairman from 1998 a Fellow of the Australian Institute of Company Directors. until the appointment of Mr Levy in April 2008, and has He is Chairman of Cromwell’s Nomination & Remuneration acted as Chief Executive Officer since that date. He has Committee, Chairman of Cromwell’s Investment Committee, been a director of companies in the property, energy and and a member of Cromwell’s Audit & Risk Committee. retail sectors. Mr Weightman is a member of Cromwell’s Investment Committee. Ms Michelle McKellar – Non-Executive Director Ms McKellar has a wealth of property and portfolio Mr Daryl Wilson – Director of Finance and Funds management experience having held a number of senior Management positions with CB Richard Ellis throughout Asia-Pacific and Mr Wilson joined Cromwell in 1999 and has primary the Jen Group of Companies overseeing the development responsibility for the finance and funds management and management of a significant retail portfolio. She is functions. Mr Wilson has led the development of Cromwell’s a Senior Member of the Property and Land Economy funds management capabilities, and has many years Institute, a member of the Australian Institute of Company experience as a chartered accountant. He holds a Bachelor Directors and runs her private property companies in of Commerce and a Diploma of Financial Planning. Australia and New Zealand. Ms McKellar is a member of Information on the interests of the Cromwell Directors in Cromwell’s Nomination & Remuneration, Audit & Risk CPF (of which there are none) and in Cromwell at the date and Investment Committees. of this Explanatory Memorandum is set out in Section 8 on Mr David Usasz – Non-Executive Director page 48. Mr Usasz had 20 years experience as a partner with 7.10.2. Continuous disclosure PricewaterhouseCoopers and has been involved in merger and acquisition advice, accounting and financial consultancy, Cromwell is a ‘Disclosing Entity’ under the Corporations Act specialising in corporate re-organisations. He is currently and therefore subject to regular reporting and disclosure Chairman of Queensland Mining Corporation Limited. He holds obligations under the Corporations Act, including the a Bachelor of Commerce and is a Fellow of the Institute of preparation and lodgement of annual reports and half yearly Chartered Accountants. Mr Usasz is Chairman of Cromwell’s reports. Audit & Risk Committee and a member of Cromwell’s Cromwell is also obliged to comply with the ASX Listing Nomination & Remuneration and Investment Committees. Rules including all applicable continuous disclosure and Mr Richard Foster – Non-Executive Director reporting requirements. In particular, Cromwell has an obligation under the ASX Listing Rules (subject to certain Mr Foster is a retired licensed real estate agent with exceptions) to immediately tell the ASX about any information substantial experience in the real property industry of which it is or becomes aware which a reasonable person specialising in large-scale property acquisition for most would expect to have a material effect on the price or value of his professional life. He has had substantial input to of Cromwell Securities. Copies of the documents lodged by the growth and development of Cromwell’s business and Cromwell can be obtained from an office of ASIC or the ASX investment products. Mr Foster is a member of Cromwell’s website (www.asx.com.au). Nomination & Remuneration and Investment Committees. The following documents are available from Cromwell’s Mr Marc Wainer – Non-Executive Director website at www.cromwell.com.au: Mr Wainer has more than 35 years experience in the • the annual financial report of Cromwell for the Financial property industry in South Africa, including founding Investec Year ended 30 June 2012; Property Group, Investec Bank’s property division. Marc is Chief Executive Officer and an Executive Director of listed • the interim financial report for the half year ended 31 South African property group Redefine Properties which December 2011; and he founded, and a director of Redefine International plc, a • any continuous disclosure notices lodged by Cromwell listed property investment company which is a substantial since lodgement of the annual financial report and securityholder of Cromwell Property Group. He also is a non- before lodgement of this Explanatory Memorandum. executive director of Hyprop Investments Limited, a South Upon request Cromwell will provide, free of charge to any African listed retail property fund. CPF Unitholder who requests a copy, a paper copy of any of Mr Michael Watters – Non-Executive Director the documents listed above. Mr Watters is a registered professional engineer with a BSc Eng. (Civil) Degree and an MBA and has over 25 years experience in the investment banking and real estate industries. He has held directorships of some of South Africa’s top rated listed property funds including Sycom Property Fund and Hyprop Investments Limited. He is the Chief Executive Officer of the Redefine International Group.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 45 7.10.3. Rights and liabilities attaching to Cromwell Securities • (Powers and duties of directors) Cromwell Directors may exercise all powers of CCL that the constitution of Each Cromwell Security is comprised of one CCL Share CCL, Corporations Act or the ASX Listing Rules do not stapled to one CDPT Unit. While the CCL Shares are stapled require to be exercised by CCL in a general meeting. to CDPT Units, and the Cromwell Directors cannot issue The powers of the directors include the power to borrow CDPT Units unless an equivalent number of CCL Shares money, charge any property or business of CCL, give are also issued at the same time to the same person on the a security and to provide a guarantee. same terms, and vice versa. • (Dividends and reserves) Cromwell Directors may by Cromwell Directors must not do anything that would result in resolution declare a dividend or determine a dividend a CCL Share no longer being stapled to a CDPT Unit. Stapling is payable. The directors may also set aside an amount will cease to apply only where approved by special resolution out of profits as a reserve before such declaration or or an administrator, manager, receiver, liquidator or similar determination. All fully paid CCL Shares are entitled to office is appointed to the stapled entity of CDPT and CCL or participate in dividends equally. The Cromwell directors its property and Cromwell Directors resolve that the stapling may: provisions should cease to apply. −− deduct amounts payable by the relevant CCL Set out below are the material provisions of the constitutions Shareholder to CCL from any dividend payable; of CCL and CDPT. Copies of these constitutions are available, free of charge, on request from Cromwell Investor Services −− resolve to pay a dividend wholly or partly by on 1300 276 693. the transfer or distribution of specific assets; −− establish a plan under which CCL Shareholders may CCL constitution elect to reinvest cash dividends by subscribing for CCL The constitution of CCL sets out the rights and benefits Shares; attaching to the CCL Shares. The key provisions of the −− to the extent authorised by resolution in a general constitution of CCL include: meeting, resolve that CCL Shareholders may elect • (CCL Shares) Cromwell Directors may: to receive CCL Shares in lieu of dividends; and −− issue and allot or dispose of CCL Shares on terms and −− resolve to capitalise profits or reserves of CCL for at a price determined by Cromwell Directors and with distribution. any rights and restrictions; • (Winding up) If CCL is wound up, the liquidator may, with −− grant options over unissued CCL Shares; and the sanction of a special resolution, divide the assets of −− issue preference shares. CCL amongst the CCL Shareholders or vest all or any of the assets of CCL in a trustee. • (Transfer) CCL Shares are transferable in accordance with any method of transfer required or permitted by • (Indemnity and insurance) To the extent permitted by the Corporations Act and the ASX. The directors of CCL law, CCL may indemnify any current or former officer must refuse to register any transfer of units where they of CCL, against every liability incurred by that person in are required to do so by the ASX Listing Rules and the that capacity (except liability for legal costs) and legal constitution of CCL. costs incurred in defending or resisting proceedings in which the person becomes involved because of that • (General meetings) A director of CCL may call a capacity. CCL may purchase insurance, to the extent meeting of CCL Shareholders and must call annual permitted by law, insuring a person who is or has been general meetings in accordance with the Corporations an officer of CCL, against any liability incurred by the Act. CCL Shareholders may also request or call and person in that capacity. arrange to hold general meetings in accordance with the Corporations Act. Each CCL Shareholder is entitled • (Shareholder disclosure) Where a CCL Shareholder to receive notice of general meetings and attend and enters into an arrangement restricting the transfer unless not eligible, vote at general meetings. While or other disposal of shares and it is an arrangement stapling applies, a meeting of CCL Shareholders may be which CCL is required to disclose under the ASX Listing held in conjunction with a meeting of CDPT Unitholders. Rules, the CCL Shareholder must provide the required information to CCL. • (Votes of members) At a CCL general meeting, every CCL Shareholder has one vote on a show of hands and one vote for each fully paid CCL Share on a poll or a fraction of a vote equivalent to the proportion which the amount paid is of the total amounts paid. A CCL Shareholder may vote in person, by proxy, attorney or representative. • (Appointment and removal of directors) By resolution passed in a general meeting, a Cromwell Director may be removed and where that outgoing Cromwell Director is a non-executive director, another may be elected.
46 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting CDPT constitution • (Votes of members) Every CDPT Unitholder has one The constitution of CDPT sets out the rights and benefits vote on a show of hands and one vote for each dollar attaching to the CDPT Units. The key provisions of the of the value of the total units they have in CDPT. constitution of CDPT include: Each CDPT Unitholder is entitled to receive notice of general meetings and attend and unless not eligible, • (CDPT Units) CDPT RE may: vote at CDPT Unitholder meetings. While stapling −− issue CDPT Units at the current market value with or applies, a meeting of CDPT Unitholders may be held in without special rights or restrictions; conjunction with a meeting of CCL Shareholders. −− issue options with no voting rights or interests in • (Distributions) CDPT RE may determine at any time to CDPT on such terms and conditions and price as it distribute capital or income to the CDPT Unitholders determines; and for a distribution period being either a calendar quarter −− not offer, allot or issue CDPT Units unless, at the or such period nominated by CDPT RE. The amount same time, CCL Shares are also offered, allotted or of the distribution is determined by CDPT RE or if no issued (as applicable) to the same person, to form a determination is made for a period ending the 30 June stapled security. of any year, the distribution amount is the net income of CDPT for that period. CDPT RE may withhold from • (Powers of CDPT RE) CDPT RE has all powers and distributions an amount which CDPT RE considers is responsibilities of a natural person and a body corporate necessary to minimise variability in distribution amounts including the power to invest, borrow, raise money, enter over distribution periods. Unitholders of CDPT may into any financial arrangement and appoint an agent. reinvest the distribution where the right is offered under • (Valuation) Subject to an applicable law, the value of a disclosure document issued by CDPT RE, by notice in an asset will be the current market value of that asset writing to all unitholders of CDPT or by giving notice to determined having regard to an applicable law, the CDPT RE to request it. nature and characteristics of the asset and the market • (CDPT RE) CDPT RE and its associates may hold CDPT for that asset at the time of valuation and the basis of Units and CCL Shares in any capacity. Subject to the that determination. Corporations Act, CDPT RE is not restricted from dealing • (Transfer) CDPT Units may be transferred in the or being interested in any contract or transaction with approved form. CDPT RE may refuse to register a itself, Cromwell or its directors or members or with any transfer in any of the circumstances permitted by the member of CDPT, acting in the same or similar capacity ASX Listing Rules. CDPT RE must refuse to register any in relation to any other managed investment scheme or transfer of CDPT Units where they are required to do so lending money to or borrowing money from or providing by the ASX Listing Rules and the constitution of CDPT. or receiving guarantees or security from Cromwell or • (Application) CDPT RE may reject an application in any of their associates. If CDPT RE acts in good faith and whole or in part without giving reasons for the rejection. without gross negligence, deceit or a material breach CDPT RE may set a minimum application amount and of covenant, it is not liable to CDPT Unitholders for any a minimum holding for CDPT and alter or waive those loss suffered in any way relating to CDPT. The liability of amounts at any time. CDPT RE to any person other than a CDPT Unitholders in respect of CDPT is limited to CDPT RE’s ability to • (Issue Price) Unless the Corporations Act or the be indemnified from the assets of CDPT. CDPT RE is constitution of CDPT provides otherwise, the issue price entitled to be indemnified out of the assets of CDPT for the issue of new CDPT Units is the average of the for any liability incurred by it in properly performing or daily volume weighted average price for all Cromwell exercising any of its powers or duties in relation to CDPT. Securities sales (including sales that are special crossings) on the ASX during the previous 10 trading • (Termination) Upon termination, assets or proceeds days immediately preceding that day divided by the remaining after application to current, contingent or average paid up proportion of Cromwell Securities. prospective expenses and liabilities will be distributed to CDPT Unitholders pro-rata to their holdings of units in • (Redemption) CDPT RE is under no obligation to redeem CDPT. a CDPT Unit. • (CDPT Unitholder meetings) A CDPT Unitholder meeting may be called and arranged by CDPT RE. CDPT Unitholders with at least 5% of votes that may be cast on the resolution or at least 100 CDPT Unitholders who are entitled to vote on the resolution, may request a unitholder meeting be held or put resolutions to meetings of CDPT Unitholders. Each CDPT Unitholder is entitled to receive a notice of meeting.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 47 8. Additional Information about Cromwell
8.1. Interests of Cromwell Directors in CPF 8.5. Complaints handling No CPF Units are held by, or on behalf of, any Cromwell If Cromwell Securityholders want to make a complaint about Director. the way in which Cromwell is being managed, they should write to: 8.2. Interests of Cromwell Directors in The Dispute Resolutions Officer Cromwell Cromwell Property Securities Limited GPO Box 1093 The table below sets out the number of Cromwell Securities Brisbane QLD, 4001 and Cromwell performance rights held by Cromwell Alternatively, they can email [email protected] Directors as at 24 August 2012: or call Cromwell Investor Services on 1300 276 693. Director Number of Number of Cromwell will acknowledge any complaint in writing Cromwell Cromwell and, where possible, aims to resolve each complaint and Securities Performance communicate its decision to the complainant within 45 days Rights of receiving the complaint. Geoffrey Levy 2,610,750 0 If a Cromwell Securityholder is not satisfied with Cromwell’s response they can refer their complaint to the following Michelle McKellar 454,500 0 independent dispute resolution scheme, of which Cromwell is a member: David Usasz 2,320,000 0 Financial Ombudsman Service Robert Pullar 14,000,000 0 GPO Box 3 Richard Foster 4,061,765 0 Melbourne VIC 3001 Alternatively, further information is available by contacting Marc Wainer 0 0 the Financial Ombudsman Service on: Michael Watters 0 0 Phone: 1300 780 808 Geoff Cannings (Michael Watters’ alternate) 58,000 0 Website: www.fos.org.au Email: [email protected] Paul Weightman (Executive Director) 15,921,167 4,000,000 Daryl Wilson (Executive Director) 1,972,200 1,740,000 8.6. No cooling-off rights Merger Participants who receive Cromwell Securities will not Cromwell Directors may hold the Cromwell Securities shown have cooling-off rights. This means that Merger Participants above directly, or through holdings by companies, trusts or will not be able to return Cromwell Securities once they are other persons with whom they are associated. issued to them as part of the Merger.
8.3. Voting Exclusions 8.7. Pricing discretion Cromwell holds approximately 17.6% of the CPF Units CDPT RE will, if the Merger is implemented, exercise certain on issue at the date of this Explanatory Memorandum. discretions regarding the price at which the Cromwell Given its interest in the outcome of the Meeting, and Securities forming the Merger Consideration are issued. As the implementation of the Merger, Cromwell will not vote a result, it will need to prepare certain documents under on the Resolutions at the Meeting. subsections 601GAB (6) or (7) of the Corporations Act (as notionally inserted by ASIC Class Order 05/26). Those documents are available free of charge from CDPT RE. 8.4. Labour, Social, Ethical and Environmental Disclosure All of Cromwell’s investment decisions are made on a solely economic basis. Labour standards, environmental, social or ethical considerations were not taken into account by Cromwell when decisions were made in relation to the Merger.
48 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 9. Financial Information
9.1. Introduction the key assumptions, and make their own independent assessment of the future performance and prospects of CPF This Section contains a summary of relevant historical, pro and Combined Cromwell. forma and forecast Financial Information of CPF, Cromwell (prior to the Merger) and Combined Cromwell as set out The FY13 forecast income statement of Combined Cromwell below. has been prepared to show the impact of the Merger assuming the Implementation Date occurs on 30 September Historical and Pro Forma Historical Financial Information 2012. • historical income statement of CPF for FY11 and FY12; Pro Forma Historical Financial Information • historical pro forma income statement of Combined The historical pro forma income statement of Combined Cromwell for FY12 as though the Merger had occurred Cromwell for FY12 has been prepared to show the impact of on 1 July 2011; the Merger as though the Merger occurred on 1 July 2011 • historical balance sheet of CPF as at 30 June 2012; and and was in place for all of FY12. • pro forma balance sheet of Combined Cromwell as at The pro forma balance sheet of Combined Cromwell as 30 June 2012 as though the Merger had occurred at that at 30 June 2012 has been prepared to show the impact of date. the Merger as though the Merger had occurred at that date. Forecast Financial Information The pro forma Financial Information should be read • forecast income statement of CPF for FY13; and together with the assumptions set out in Section 9.6 on • forecast income statement of Combined Cromwell page 54, the Risk Factors set out in Section 5 on page 30 for FY13. and in Section 10 on page 56, the Investigating Accountant’s Report in Annexure 1 on page 68 and other information in The forecast Financial Information should be read together this Explanatory Memorandum. with the notes and assumptions accompanying the Financial Information in this Section and the Risk Factors set out in Operating Earnings Section 5 on page 30 and Section 10 on page 56. Operating Earnings is a term used by Cromwell and other The Investigating Accountant has reviewed the Financial AREITs to describe earnings excluding certain non-cash Information as set out in the Investigating Accountant’s and other items which are recognised in the statutory Report in Annexure 1 on page 68. CPF Unitholders should accounts as required by Australian Accounting Standards. note the comments made in relation to the scope and In the opinion of the Cromwell Directors, statutory profit or limitations of the review. reported profit needs to be adjusted for these items in order to allow investors to gain a better understanding of the profit available for distribution for CPF and Combined Cromwell. 9.2. Basis of Preparation The Cromwell Directors believe that Operating Earnings The Financial Information in this Section should be read in more closely approximate earnings available for distribution conjunction with the significant accounting policies outlined which is relevant to users of CPF’s and Cromwell’s financial in CPF’s and Cromwell’s FY12 audited financial reports which reports. specify the basis of preparation. A copy of the respective A reconciliation of CPF’s statutory profit/(loss) for FY11 and FY12 financial reports can be downloaded from Cromwell’s FY12 to Operating Earnings for FY11 and FY12, as assessed website at www.cromwell.com.au. by the Cromwell Directors, is set out in Section 9.5 on page Forecast Financial Information 52. The pro forma statutory profit of Combined Cromwell for FY12 has also been reconciled to the pro forma Operating The forecast Financial Information is based on a number Earnings of Combined Cromwell for FY12, as assessed by of estimates and assumptions concerning future the Cromwell Directors, in Section 9.5 on page 52. Operating events, including the general and specific best estimate Earnings have been calculated on a consistent basis for assumptions set out in Section 9.6 on page 54. FY11, FY12 and FY13. The Cromwell Directors and CPF Directors consider the information and assumptions used to prepare the forecast Financial Information, when taken as a whole, to be appropriate and reasonable at the time of preparation. However, future matters are subject to significant uncertainties, many of which are outside the control of CPF RE and Cromwell and are not capable of being foreseen or accurately predicted. As a result, no assurance can be given that the forecasts will be achieved. CPF Unitholders should review the information detailed in this Section 9, including
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 49 9.3. Historical and pro forma balance sheets Set out below is a summary of the historical balance sheets of CPF and Cromwell as at 30 June 2012 and the pro forma balance sheet of Combined Cromwell as at 30 June 2012 assuming the Merger had occurred at that date.
30 June 2012 $’000
Pro Forma Combined CPF Cromwell Adjustments Cromwell Current assets Cash and cash equivalents 2,002 59,153 (14,921) 46,234 Trade and other receivables 664 21,505 (6,995) 15,174 Other current assets 367 1,851 - 2,218 Total current assets 3,033 82,509 (21,916) 63,626
Non-current assets Receivable – CPF - 19,800 (19,800) - Investment properties 168,400 1,724,400 (2,700) 1,890,100 Inventories – industrial land - 3,000 2,700 5,700 Investment in CPF - 4,705 (4,705) - Other non-current assets - 3,187 - 3,187 Total non-current assets 168,400 1,755,092 (24,505) 1,898,987 Total assets 171,433 1,837,601 (46,421) 1,962,613
Current liabilities Trade and other payables 4,069 14,472 (2,655) 15,886 Derivative financial liabilities 1,779 15,127 - 16,906 Borrowings – Cromwell 23,862 - (23,862) - – Banks 2,790 21,533 (13,913) 10,410 Distributions payable 325 20,470 (50) 20,745 Provisions - 1,368 (228) 1,140 Other current liabilities 940 6,735 - 7,675 Total current liabilities 33,765 79,705 (40,708) 72,762
Non-current liabilities Borrowings – banks 109,051 942,644 - 1,051,695 Derivative financial liabilities 1,790 25,501 - 27,291 Provisions - 762 - 762 Total non-current liabilities 110,841 968,907 - 1,079,748 Total liabilities 144,606 1,048,612 (40,708) 1,152,510 Net assets 26,827 788,989 (5,713) 810,103
Equity attributed to shareholders - 19,311 - 19,311 Equity attributed to unitholders 26,827 769,678 (5,713) 790,792 Equity attributed to securityholders 26,827 788,989 (5,713) 810,103
No. of securities on issue (‘000) 171,001 1,169,689 1,202,081
Net tangible assets per security (cents) 15.7¢ 67.3¢ 67.3¢ Gearing (total borrowings: total assets) 79% 53% 54%
50 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Pro forma balance sheet adjustments unless there are sufficient resources available to CPF to The following adjustments have been made to the Combined repay the Cromwell Loans in whole or in part, or CPF is in Cromwell pro forma balance sheet as at 30 June 2012 to default of its Bank Loan. reflect the impact as if the Merger had taken place at that The Cromwell Loans have been in existence for a number date: of years with a history of being extended on or before each (i) Acquisition of all CPF Units, except for those CPF Units facility’s expiry date, if not repaid. CPF’s ongoing operations held by Cromwell, the consideration being paid by are dependent on the Cromwell Loans not being called the issue of 32,392,000 Cromwell Securities. upon over the next twelve months. As such, there remains uncertainty as to whether CPF will be able to continue as (ii) Payment of Transaction Costs associated with the a going concern and whether it will realise its assets and Merger estimated at $1,008,000 (allocated between CPF extinguish its liabilities in the normal course of business at $397,000 and Cromwell $611,000). the amounts stated in the balance sheet. No adjustments (iii) Elimination of inter-entity receivables, payables and have been made relating to the recoverability and borrowings. classification of assets or the amounts and classification of liabilities that might be necessary should CPF not continue (iv) Repayment of $13,913,000 borrowings by Cromwell as a going concern. which occurred in July 2012. CPF – ongoing operations 9.4. Calculation of Merger Consideration The CPF balance sheet as at 30 June 2012, summarised Under the Merger, Cromwell is to acquire all the CPF above shows a net current asset deficiency of $30,732,000 Units except for the 30,020,040 CPF Units already held by (current assets of $3,033,000 less current liabilities of Cromwell (which represents approximately 17.6% of all CPF $33,765,000). Included in current liabilities are secured Units). The Merger Consideration is to be paid by the issue borrowings of $2,790,000 and unsecured borrowings of of Cromwell Securities. The exchange values are to be $23,862,000. The secured borrowings represent the loan determined based on the NTA of both CPF and Cromwell as reduction required by 30 June 2013 to comply with the LVR at 30 June 2012, adjusted for Transaction Costs. associated with the Bank Loan. The Cromwell Property Set out below is a summary of the adjusted NTA, based on Loan comprises of $4,062,000 which is at call with no fixed the balance sheets of CPF and Cromwell as at 30 June 2012, repayment terms (the Cromwell Industrial Land Loan) and the number of Cromwell Securities to be issued to the and $19,800,000 is repayable on 30 September 2012 (the CPF External Unitholders as the Merger Consideration. Cromwell Property Loan). CPF expects these Cromwell Loans not to be called upon over the next twelve months
30 June 2012 $’000
Pro Forma Combined CPF Cromwell Adjustments Cromwell Exchange Value Calculation ($’000) Net assets at 30 June 2012 (Section 9.3) 26,827 788,989 (5,713) 810,103 Less intangible assets - (1,547) - (1,547) NTA at 30 June 2012 26,827 787,442 (5,713) 808,556 Less Transaction Costs (397) (611) 1,008 - Adjusted NTA at 30 June 2012 26,430 786,831 (4,705) 808,556 Elimination of Cromwell’s interest in CPF (4,637) - 4,705 68 Adjusted NTA – Attributable to external securityholders 21,793 786,831 - 808,624 2.7% 97.3% 100%
No of Securities on issue 30 June 2012 (‘000) Cromwell Securityholders - 1,169,689 1,169,689 Cromwell’s CPF Units 30,020 - - CPF External Unitholders 140,981 - 32,392 171,001 1,169,689 1,202,081 Adjusted NTA ÷ No. of Securities 15.46c 67.27c Merger Ratio 0.2298 to 1 Issued to CPF External Unitholders* 32,392 1,169,689 2.7% 97.3% NTA per security 67.3¢ 67.3¢ 67.3¢ * The number of Cromwell Securities to be issued to CPF External Unitholders as the Merger Consideration has been determined based on the NTA of each entity shown above and the number of issued securities in Cromwell as at 30 June 2012.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 51 9.5. Income statements The table below sets out: • historical income statement of CPF for FY11 and FY12; • forecast income statement of CPF for FY13; • historical pro forma income statement of Combined Cromwell for FY12 as though the Merger had been in place for all of FY12; and • forecast income statement of Combined Cromwell for FY13 assuming the Implementation Date occurred on 30 September 2012.
$’000
CPF Combined Cromwell Actual Actual Forecast Historical Pro Forma Forecast FY11 FY12 FY13 FY12 FY13 Revenue Rental income, net of outgoings 15,242 14,541 14,316 165,266 170,787 Funds management fees - - - 3,539 8,925 Interest 302 121 34 3,211 1,937 Share of profits – CPF1 - - - - 178 – Other 138 - - - - Other revenue 108 199 - 303 242 15,790 14,861 14,350 172,319 182,069
Expenses Administration costs 656 748 440 - - Employee benefits expense - - - 13,347 14,929 Finance costs 13,249 10,368 9,848 73,267 73,248 Loss on sale of assets - - - 375 - Income tax expense - - - 120 499 Other expenses - - - 7,449 7,296 13,905 11,116 10,288 94,558 95,972 Fair value net loss/(gains) from2: Investment properties 8,285 1,577 13,930 Interest rate derivatives (890) 2,884 41,367 Investments / receivables - 200 173 21,300 15,777 10,288 150,028 95,972 Profit/(Loss) (5,510) (916) 4,062 22,291 86,097 Profit/(Loss) – cents per security (3.2¢) (0.5¢) 2.4¢ 2.0¢ 7.2¢
1 Comprises Cromwell’s 17.6% share of CPF’s forecast profit for the 3 months to 30 September 2012 (pre-Merger). 2 No fair value adjustments for investment properties, interest rate derivatives and investments have been forecast in FY13 as these items are not capable of being accurately forecasted.
The historical income statements of CPF for FY11 and FY12 Management discussion and analysis have been extracted from CPF’s audited financial reports. The historical pro forma income statement of Combined CPF Cromwell for FY12 has been extracted from Cromwell’s Rental income and finance costs have reduced over the audited financial report and adjusted for the Merger as if it periods under review due to the sale of investment properties had been in place for all of FY12. Rental income has been and corresponding reduction in debt. In FY11 CPF sold a offset by related property expenses and outgoings. Income number of its investment properties including: tax expense for Cromwell has been included in expenses and • Exhibition Street, Melbourne for $90.2 million to applies to CCL and its subsidiaries. Cromwell in July 2010; No adjustment has been made to the forecast Financial • one-third interest in Cromwell TGA Planned Investment Information for the impact of straight lining lease income to Cromwell (which already held a two-third interest) for and amortisation of lease incentives and lease costs on the $25 million in July 2010; carrying value of investment properties in FY13. • Twin Freeway Centre, Avalon for $20.7 million in July 2010;
52 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting • Lenore Lane, Erskine Park for $15 million capital for the launch of a new managed fund, Cromwell in August 2010; and Ipswich City Heart Trust. • the Gold Coast investment properties for $42 million The forecast increase in rental income in FY13 is mostly in December 2010. due to a full year of rent from HQ North Tower and Bundall As a result of these asset sales, together with cash flow from Corporate Centre. The Combined Cromwell pro forma operations, total borrowings reduced from $330 million at FY12 income statement includes rental income from the June 2010 to $136 million at June 2012, reducing the overall CPF Properties for the full year whereas the FY13 income gearing (including the Cromwell Loans) to 79%. statement includes the CPF Properties for nine months (from 30 September 2012). In FY12 there were no property sales. The Bank Loan was extended in May 2012 for a further 3 years to June Fund management fees are forecast to increase in FY13, 2015. In June 2012 the major tenant at the Smithfield primarily due to the transaction fees forecast to be earned Property defaulted and subsequently vacated the premises. from Cromwell Ipswich City Heat Trust, and a new unlisted This resulted in a reduction in the fair value of the property. property fund forecast to be launched in FY13. At 30 June 2012 the LVR associated with the Bank Loan was Finance costs are forecast to remain similar to FY12 on the 66.7%. The LVR limit on the Bank Loan was 65% but was basis that the effective interest rate payable by Cromwell increased to 70% until 30 June 2013 to allow CPF time to decreases in FY13 as a result of reduction in variable reduce the LVR on the Bank Loan. interest rates and interest relating to the Bank Loan and the Cromwell – pro forma Cromwell Loans are included in Combined Cromwell FY13 for 9 months (compared to 12 months in FY12). In FY12 Cromwell undertook capital raisings of $134 million and arranged additional borrowings of approximately Operating Earnings as assessed by the Cromwell Directors $186 million. These funds were utilised to fund the A reconciliation of the statutory profit as reported in the acquisition of the HQ North Tower in Brisbane, the Bundall income statement, and set out above in this Section 9.5, to Corporate Centre on the Gold Coast, and to provide working Operating Earnings as assessed by the Cromwell Directors, is as follows:
$’000
CPF Combined Cromwell Historical Actual Actual Forecast Pro Forma Forecast FY11 FY12 FY13 FY12 FY13 Profit/(Loss) per Income Statement (5,510) (916) 4,062 22,291 86,097
Fair Value Adjustments: Fair value loss/(gain) from1: − Investment properties 8,285 1,577 13,930 − Interest rate derivatives (890) 2,884 41,367 − Other - 200 173
Other Adjustments to Operating Profit: Loss/(gain) on sale of investment properties (65) - - 375 - Other income (32) - - - - Non-cash rental income adjustments: − Straight line lease income 187 (397) (133) (7,289) (7,896) − Lease incentive and lease cost amortisation 1,120 1,229 655 8,934 10,964 Other non-cash expenses: − Amortisation of finance costs 609 357 132 2,919 2,030 − Employee options expense - - - 601 619 − Amortisation and depreciation - - - 604 500 − Share of profits – CPF2 - - - - 29 − Net tax losses utilised - - - 177 - Operating Profit assessed by Cromwell Directors 3,704 4,934 4,716 84,082 92,343 Operating Profit – cents per security 2.2¢ 2.9¢ 2.8¢ 7.6¢ 7.6¢ Distributions 2,851 3,421 - 77,350 86,550 Distributions – cents per security 1.7¢ 2.0¢ - 7.0¢ 7.2¢
1 No fair value adjustments for investment properties, interest rate derivatives and investments have been forecast in FY13 as these items are not capable of being accurately predicted. 2 Comprises non-cash rental adjustments included in share of profits of CPF equity accounted by Cromwell pre-Merger (3 months to 30 September 2012) in FY13.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 53 Operating Earnings and Distribution for CPF External Unitholders An analysis of Operating Earnings, and distributions applicable to CPF External Unitholders, is set out below. The Operating Earnings and Distributions applicable to CPF External Unitholders and included in the historical pro forma income statement of Combined Cromwell for FY12 assumes the Merger for the full year and is based on the Merger Consideration set out in Section 9.4 on page 51. The forecast pro forma income statement of Combined Cromwell for FY13 assumes the Implementation Date is 30 September 2012.
$’000
CPF Combined Cromwell Historical Actual Actual Forecast Pro Forma Forecast FY11 FY12 FY13 FY12 FY13 Effective Operating Earnings – cents per CPF Unit 2.2¢ 2.9¢ 2.8c 1.6¢* 1.8¢* Effective Distributions – cents per CPF Unit 1.7¢ 2.0¢ - 1.6¢* 1.7¢* * Combined Cromwell Operating Earnings and distributions applicable to CPF External Unitholders, expressed in terms of cents per CPF Unit, are the amounts that will effectively be received per CPF Unit if the Merger is implemented.
The reduction in effective Operating Earnings per CPF Unit, Specific Assumptions – CPF assuming the Merger is implemented, is primarily due to • net property rental income: the lower gearing levels in Combined Cromwell compared −− there are no tenant defaults during FY13; to CPF. This also needs to be considered in relation to current debt facilities with CPF, both the Bank Loan and −− rental income from existing leases increases in the Cromwell Loans, and CPF’s ability to fund major capital accordance with their terms and conditions; expenditure programs and/or reduction in debt without −− potential leases subject to heads of agreement are further asset sales. finalised in accordance with their agreed terms; The Cromwell Directors are forecasting no distributions −− an allowance for a reasonable re-leasing period and will be paid by CPF in FY13 as cash flow from operations associated leasing costs for vacant tenancies and will be required to be substantially used to fund budgeted leases expiring during FY13; improvements to CPF Properties and to pay lease incentives and lease costs. Under the Merger, Cromwell is forecasting −− property outgoings and other recoveries are collected to distribute 7.25 cents per Cromwell Security in FY13, which from tenants in accordance with the relevant lease is equivalent to approximately 1.7 cents per existing CPF provisions and increase by CPI of 2.5% p.a.; and Unit. −− expenditure on capital improvements and lease incentives forecast to occur during FY13 will result in 9.6. Preparation of the Forecast Financial a corresponding increase in valuations for the CPF Properties and will reduce the LVR on the Bank Loan Information to 65% or lower. The forecast Financial Information has been prepared using • CPF complies with loan covenants and there is no the following key assumptions, which should be read in requirement to repay borrowings in FY13, including the conjunction with the Risk Factors in Section 5 on page 30 and Cromwell Loans; and Section 10 on page 56: • existing interest rate hedges remain in place, facility General Assumptions margins remain unchanged and variable interest rates average 3.8% for FY13, leading to a weighted average • no specific change in the current economic conditions interest cost of 7.1% in FY13. prevailing in Australia; • there are no distributions declared in FY13. • no fair value adjustments for interest rate derivatives and investment properties have been forecast for FY13; Specific Assumptions – Pro Forma Cromwell • no investment property acquisitions or disposals; • net property income: • no changes in accounting standards or other mandatory −− there are no tenant defaults during FY13; professional reporting requirements or the Corporations −− rental income from existing leases inc reases in Act which would have a material effect on CPF’s and accordance with their terms and conditions; Cromwell’s financial performance or balance sheet; and −− potential leases subject to heads of agreement are • no material change to the capital structure of either CPF finalised in accordance with their agreed terms; or Cromwell other than as contemplated by the Merger.
54 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting −− an allowance has been included for a reasonable Management Discussion and Analysis re-leasing period and associated leasing costs for • Rental income – A large component of CPF and currently vacant tenancies and leases expiring during Cromwell’s rental income is contracted in the form of FY13; and property leases which currently reflects high occupancy −− property outgoings and other recoveries are collected levels. Approximately 89% of CPF’s forecast net property from tenants in accordance with the relevant lease income and 96% of Combined Cromwell’s forecast net provisions and increase by CPI of 2.5% p.a. property income in FY13 is secured by the existing leases in place. • fund management fees: • Finance costs – A large component of CPF and −− Cromwell launches one new direct property fund in Cromwell’s interest costs are effectively fixed through FY13 and earns acquisition fees of $1,875,000 which interest rate derivative contracts. Interest payments is equivalent to a 2.5% fee on investment property to in FY13 in respect of approximately 66% of CPF’s the value of $75 million. borrowings (including the Cromwell Loans) and 92% of • interest rates: Combined Cromwell’s borrowings are effectively fixed −− existing interest rate hedges remain in place faculty through these arrangements. managers remain unchanged and variable interest • Interest rates – The sensitivity analysis in respect of rates average 3.8% for FY13, leading to a weighted movements in variable interest rates does not take into average interest cost of 6.7% in FY13. consideration the impact on the fair value of interest rate −− variable interest rates (BBSY) average 3.80% for FY13 derivatives. and existing interest rate hedging remains in place. Interest margins on loan facilities remain unchanged for FY13.
9.7. Sensitivity Analysis The forecast Financial Information has been based on certain economic and business assumptions about future events. The forecast statutory profit and Operating Earnings for CPF and Combined Cromwell are sensitive to a number of factors. A summary of the possible impact of different outcomes in the key assumptions underlying forecast earnings is set out below. However, the disclosed movements in these key assumptions are not intended to be indicative of the complete range of variations that may occur.
Impact on Profit in FY13
$’000 EPS (¢) Sensitivity – CPF Revenue 50% of forecast rental income from lettable space with lease expiries or vacancies in FY13 is not received -635 -0.4¢
Expenses +/-1.0% movement in variable interest rates ±455 ±0.3¢
Fair value adjustments +/- 2% change in fair value of investment properties ±3,368 ±2.0¢
Sensitivity – Combined Cromwell Revenue 50% of forecast rental income from lettable space with lease expiries or vacancies in FY13 is not received -3,361 -0.3¢ Transaction fees from new fund not achieved (net of tax impact) -1,510 -0.1¢
Expenses +/-1.0% movement in variable interest rates ±980 ±0.1
Fair value adjustments +/- 2% change in fair value of investment properties ±37,802 ±3.1¢
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 55 10. Risks
Cromwell Securityholders are exposed to a number of risks. Tax consequences for Cromwell Securityholders will be These risks can be broadly classified as general risks that specific to their individual circumstances. General tax may impact any equity investment and, risks specific to the implications of the Merger are discussed in Annexure 2 on property industry. page 77. Risks outlined in this Section are risks that may impact an Cromwell Securityholders and prospective investors should investment in either Cromwell Securities or CPF Units. The consult with their tax and/or other professional advisers in list is not exhaustive and there may be other risks that could respect of the particular tax consequences of purchasing, affect the performance of Cromwell. owning or disposing of Cromwell Securities in light of their Risks specific to an investment in Cromwell Securities are particular situation. set out in Section 5 on page 30. 10.1.4. Regulatory issues and changes in law 10.1. General Equity Investment Risks The financial performance of Cromwell may be materially affected by adverse changes in laws or other government regulation. Changes in government policy (including fiscal, 10.1.1. Competition monetary and regulatory policies at federal, state and local The value of property held by Cromwell may be negatively levels), may affect the amount and timing of Cromwell’s affected by oversupply or overdevelopment in surrounding future profits. areas. Further, property assets come under competitive pressure from time to time and a change in the competitive 10.1.5. Funding environment can impact on the performance of the relevant Property investment is highly capital intensive. The ability of property(s) and therefore the income of Cromwell. Cromwell Cromwell to raise debt funding or equity on similar terms may also be adversely affected if the price for a property it is to those currently in place for future refinancing, property considering for acquisition becomes inflated via competing improvement and acquisitions depends on a number of bids by other prospective purchasers. factors including general economic, political, capital and credit market conditions. The inability of Cromwell to raise 10.1.2. Insurance funds on similar terms could adversely affect its ability to Cromwell generally enters into contracts of insurance that acquire or improve properties or refinance its debt. Where provide a degree of protection over assets, liabilities and Cromwell has received credit approval for new facilities people. While such policies typically cover against material that are still subject to documentation, the final form of the damage to assets, contract works, business interruption, documentation of the new facilities may include different general and professional liability and workers compensation, terms and conditions that may impact on the economic effect there are certain risks that cannot be mitigated by insurance, of the facilities for Cromwell. either wholly or in part, such as nuclear, chemical or biological incidents or risks where the insurance coverage 10.1.6. Refinancing requirements is reduced or unavailable, such as cyclones, floods or Cromwell is exposed to risks relating to the refinancing earthquakes. Also, insurers may not be able to meet of existing debt facilities. In the future Cromwell may indemnity obligations if and when they fall due, which could experience some difficulty in refinancing some or all of its have an adverse effect on earnings. debt facilities. If that is the case, some of its assets may Further, the nature and cost of insurance cover taken is need to be sold and, possibly, at less than current valuations. based upon the best estimate of likely circumstances for The terms on which they are refinanced may also be less the Cromwell in the relevant period. Unforseen factors may favourable than at present. result in the insurance cover being inadequate or the cost of the insurance premiums being in excess of that forecast. 10.1.7. Debt covenants This may have a negative impact on the Cromwell’s net Cromwell has various covenants in relation to its debt income and /or the value of its assets. facilities, including interest cover and loan to value ratio 10.1.3. Taxation requirements. Factors such as falls in asset values or property income could lead to a breach of debt covenants. Future changes in Australian taxation law, including changes In this case, Cromwell’s lenders may require their loans in interpretation or application of the law by the courts to be repaid immediately or additional interest and further or taxation authorities in Australia, may affect taxation borrowing costs may be payable. treatment of an investment in Cromwell Securities, or the holding and disposal of those securities. Further, changes in tax law, or changes in the way tax law is expected to be interpreted in the various jurisdictions in which Cromwell operates may impact the future tax liabilities of Cromwell.
56 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 10. Risks
10.1.8. Interest rates and financial instruments 10.2. Property Market Risks Adverse fluctuations in interest rates, to the extent that they are not hedged, may impact Cromwell’s earnings. Where 10.2.1. Change in value and income of investment properties interest rates are hedged by way of financial instruments, the Returns from investment properties largely depend on the value of those instruments can vary substantially which can rental income generated from the property and the expenses impact both earnings and net assets. incurred in its operation, including the management and maintenance of the property as well as the changes in the 10.1.9. Employment issues market value of the property. Rental income and/or the Cromwell is reliant on retaining and attracting quality senior market value of properties may be adversely affected by a executives and other employees. The loss of the services of number of factors, including: any senior management or key personnel, or the inability • the escalation of development costs beyond those to attract new qualified personnel, could adversely affect originally expected; Cromwell’s operations. • the overall conditions in the national and local economy, including risk appetite and business and consumer 10.1.10. Inflation confidence; Higher than expected inflation rates could be expected to • local real estate conditions, including volumes of sales increase operating costs, interest and development costs and the ability to procure tenants; and potentially reduce the value of investment properties • the perception of prospective tenants and customers and other assets. These cost increases may be offset by regarding attractiveness and convenience of properties increased selling prices or rentals. and the intensity of competition with other participants in the real estate industry; 10.1.11. Changes in accounting policy • the location and quality of properties; Cromwell must report and prepare financial statements • operating, maintenance and refurbishment expenses, as in accordance with prevailing accounting standards and well as unforeseen capital expenditure; policies. There may be changes in these accounting standards and policies in the future which may have an • supply of developable land, new properties and adverse impact on Cromwell. alternative investment properties; • investor demand/liquidity in investments; 10.1.12. General economic conditions • the capitalisation rates, which may change in response Cromwell’s operating and financial performance is to market conditions; and influenced by a variety of general economic and business • the availability of debt funding to potential purchasers of conditions, including the level of inflation, interest rates, investment property. ability to access funding, oversupply and demand conditions and government fiscal, monetary and regulatory policies. 10.2.2. Fixed costs Prolonged deterioration in these conditions, including an Significant costs associated with each property asset, such increase in interest rates or an increase in the cost of capital, as borrowing costs, taxes and maintenance will generally not could have a material adverse impact on the Cromwell’s reduce where there is a reduction of income from a property operating and financial performance. asset. The income available for distribution may decrease where property income decreases without a corresponding 10.1.13. Forward looking statements and financial forecasts decrease in fixed costs. There can be no guarantee that the assumptions and contingencies contained within forward looking statements, 10.2.3. Acquisition of further properties opinions or estimates (including projections, guidance on A key part of Cromwell’s future strategy will involve the future earnings and estimates) will ultimately prove to be acquisition of additional property assets. Whilst it is valid or accurate. The forward looking statements, opinions Cromwell’s policy to conduct a thorough due diligence and estimates depend on various factors, many of which are process in relation to any such acquisition, there exist risks outside the control of Cromwell. associated with any new acquisition. These risks could include unexpected problems or other latent liabilities 10.1.14. Occupational, health and safety (“OH&S”) such as the existence of hazardous materials or other If Cromwell fails to comply with necessary OH&S legislative environmental liabilities. requirements across the jurisdictions in which Cromwell operates, it could result in fines, penalties and compensation for damages as well as reputational damage to Cromwell.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 57 10.2.4. Leasing and tenant defaults 10.2.9. Development risks Tenants may default on their rent or other contractual Cromwell is involved in the development and refurbishment obligations, leading to a reduction in income from, or capital of property from time to time. Generally, property losses to the value of, Cromwell’s assets. Additionally, it development has a number of risks including: may not be possible to negotiate lease renewals or maintain • the risk that planning consents and regulatory approvals existing lease terms, which may also adversely impact are not obtained or, if obtained, are received later than Cromwell’s income and asset values. This is particularly the expected, or are adverse to Cromwell’s interests, or are case for a number of properties owned by Cromwell as the not properly adhered to; majority of the income earned by those properties is derived from one or more anchor tenants. • the escalation of development costs beyond those originally expected; The ability to lease or re-lease tenancies upon expiry of the • unexpected project delays; current lease, and the rents achievable, will depend upon the prevailing market conditions at the relevant time and these • anticipated sales prices or timing on anticipated sales may be affected by economic, competitive or other factors. are not achieved; • the default of pre-sales on projects, which are not 10.2.5. Liquidity and realisation risk guaranteed; Given the long term nature of investments in property assets, • non performance or breach of contract by a contractor it may be difficult to generate liquidity should Cromwell need or sub-contractor; and to respond to changes in economic or other conditions. • competing development projects adversely affecting the overall return achieved. 10.2.6. Bankruptcy or business closure of major tenants A sustained downturn in property markets caused by any The bankruptcy or business closure of a major tenant deterioration in the economic climate could result in reduced may have a material impact on the income generated development profits through reduced selling prices or delays from an asset, which may have a follow on impact on the in achieving sales. performance of Cromwell. Increases in supply or falls in demand in any of the sectors of the property market in which Cromwell operates or invests 10.2.7. Environmental could influence the acquisition of sites, the timing and value Cromwell is exposed to a range of environmental risks which of sales and carrying value of projects. may result in additional expenditure on properties and/ A number of factors affect the earnings, cashflows and or project delays. Cromwell may be required to undertake valuations of commercial property developments, including remedial works and potentially be exposed to third party construction costs, scheduled completion dates, estimated liability claims, fines and penalties, or other liabilities rental income and occupancy levels and the ability of tenants generally and as a result of the various Federal, State and to meet rental and other contractual obligations. local government environmental laws. For example, it may become liable for the cost of removal or remediation of 10.2.10. Counterparty/credit hazardous or toxic substances from a property owned by Cromwell. Third parties, such as tenants, developers and other counterparties to contracts may not be willing or able to 10.2.8. Capital Expenditure perform their obligations to Cromwell. The level of capital expenditure required for a property may materially differ from that which is forecast. Higher capital expenditure levels could reduce the financial performance of Cromwell and could materially affect distributions to Cromwell Securityholders.
58 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 11. The Meeting
11.1. General 11.2. Resolutions The Meeting is a general meeting of CPF Unitholders and The Merger is a trust scheme which is an arrangement will be held at The River Room, Stamford Plaza, corner pursuant to which all of the CPF Units are transferred Edward & Margaret Streets, Brisbane on Wednesday to CDPT RE and, in return, Cromwell pays to Merger 3 October 2012 commencing at 1pm. The Notice of Meeting Participants the Merger Consideration. At the Meeting, CPF is set out in Annexure 5 on page 160. Unitholders are being asked to consider and, if considered Each CPF Unitholder whose name appears in the CPF appropriate, to approve the following Resolutions: Register on Monday 1 October 2012 at 5pm is entitled Acquisition Resolution to attend and vote (unless that CPF Unitholder is subject The acquisition by CDPT RE of all of the CPF Units it does to the voting exclusions listed in Section 8 on page 177). not already own by an ordinary resolution of CPF Unitholders Votes may be cast in person, by proxy, online, by an for all purposes. To be passed, an ordinary resolution attorney or, in the case of a body corporate, by its corporate requires approval by more than 50 per cent of the votes representative appointed in accordance with section 253B of cast on the acquisition resolution at the Meeting by CPF the Corporations Act. Unitholders entitled to vote on the resolution. Further instructions on how to attend and vote at the Meetings in person, or to appoint a proxy, attorney, Amendment Resolution nominee or corporate representative to attend and vote The amendment to CPF Constitution to authorise all on your behalf, are set out in Annexure 6 on page 161. actions necessary or desirable for the transfer of all of CPF Units to CDPT RE. The amendments are set out in the Supplemental Deed in Annexure 7 on page 163. The constitutional amendments must be approved by a special resolution, which requires approval by at least 75 per cent of the votes cast at the Meeting by CPF Unitholders entitled to vote on the resolution. If the Resolutions are approved at the Meeting the Merger will be implemented.
11.3. Resolutions Interconditional Each of the Resolutions is interconditional, which means that the Merger will only proceed if both the Resolutions are passed at the Meeting by the requisite majorities. Please refer to Section 4.7 on page 26 for the consequences if the Merger does not proceed.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 59 12. Other Information
12.1. Interests of Cromwell Directors in 12.6. Interests of advisers contracts entered into by Cromwell Other than as set out in this Explanatory Memorandum: None of the Cromwell Directors have any interest in any • no person named in this Explanatory Memorandum contracts entered into by Cromwell which are conditional on, as performing a function in a professional, advisory or or related to, the implementation of the Merger. other capacity in connection with the preparation or distribution of this Explanatory Memorandum has, or 12.2. Other agreements or arrangements in the last two years before the date of this Explanatory Memorandum has had any interests in property acquired with Cromwell Directors or disposed, or proposed to be acquired or disposed, There is no agreement or arrangement between any by CPF or Cromwell or in the issue of CPF Units or Cromwell Director and another person in connection with, or Cromwell Securities; or conditional on, the implementation of the Merger. • no amounts have been paid or agreed to be paid, and no value or other benefit has been given or agreed to be 12.3. Payments and other benefits to given, to such persons in connection with issue of CPF Units or Cromwell Securities. Cromwell Directors, secretaries, executive officers or related bodies 12.7. Consents and disclaimers corporate The following persons have given and have not, before the It is not proposed that any payment or other benefit be date of issue of this Explanatory Memorandum, withdrawn made or given to any Cromwell Director, or any secretary or their consent to be named in this Explanatory Memorandum executive officer of Cromwell as compensation for loss of, or in the form and context in which they are named, or to the as consideration for or in connection with the Merger. inclusion of the reports noted next to their names and the It is not proposed that any payment or other benefit be references to those reports in the form and context in which made or given to any related body corporate of Cromwell in they are included in this Explanatory Memorandum: connection with the Merger. • JR Securities Limited – as Investigating Accountant and in respect of an Investigating Accountant’s Report in 12.4. ASIC matters Annexure 1 on page 68; • Deloitte Corporate Finance Pty Limited – as Independent ASIC has granted relief to CCL, CDPT RE and CPF RE from Expert and in respect of an Independent Expert’s Report certain provisions of the Corporations Act to enable the in Annexure 3 on page 83; and Merger to be implemented if the Resolutions are passed by • Minter Ellison – as legal advisers and as taxation adviser the requisite majorities. The relief includes the following: and in respect of the Taxation Report in Annexure 2 on • relief to permit differential treatment of Foreign page 77. Investors, who will not be receiving the Merger The following persons have given and have not, before the date Consideration under the Merger but will receive a cash of this issue of the Explanatory Memorandum, withdrawn their payment for each of their Units; and consent to be named in this Explanatory Memorandum in the • relief from the unsolicited offer provisions of Division 5A form and context in which they are named: of Part 7.9 of the Corporations Act. • Boardroom Pty Limited – as the CPF Registry; • Link Market Services Limited – as the Cromwell 12.5. Information disclosed to the ASX Registry; and and documents lodged with ASIC • RBS Morgans Limited – as the Foreign Investor Facility Cromwell is a disclosing entity for the purposes of the Nominee. Corporations Act and as such is subject to periodic reporting Each person referred to above neither makes, nor purports and continuous disclosure obligations. Publicly disclosed to make, any statement in this Explanatory Memorandum information about Cromwell is available on the ASX website other than the statements in the report (if any) referred to at www.asx.com.au. Cromwell’s ASX code is CMW. next to that person’s name. Further, to the maximum extent permitted by law, each person referred to above expressly disclaims and takes no responsibility for any part of this Explanatory Memorandum other than as described in this Section with that person’s consent. Each Cromwell Director has authorised, and consented to, the issue of this Explanatory Memorandum and has consented to the lodgement of this Explanatory Memorandum with ASIC. No Cromwell Director has withdrawn their consent.
60 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 12. Other Information
12.8. Benefits agreed to be given to 12.11. Summary of Merger Implementation CPF Unitholders during previous Agreement four months CCL, CDPT RE and CPF RE have entered into the Merger Other than as disclosed elsewhere in this Explanatory Implementation Agreement dated 31 August 2012 to Memorandum, in the four months before the date of this provide a framework for proposing and implementing Explanatory Memorandum, neither Cromwell nor any the Merger. A summary of the key provisions of the Merger associate of Cromwell gave or offered to give or agreed to Implementation Agreement is set out below. Terms capitalised give a benefit to another person that is not available under below are defined in the Merger Implementation Agreement. the Merger and was intended to or likely to induce the other The information contained in this Section is a summary only. A person or an associate of the other person to vote in favour copy of the Merger Implementation Agreement is available for of the Resolutions other than the agreement by Cromwell inspection at the registered office of Cromwell between 9.30am in the Deed Polls to pay the Merger Consideration in and 4.30pm on Business Days up until the Effective Date. accordance with the Merger if the Merger is implemented. (Conditions precedent) The obligations of CPF RE to implement the Merger under the Merger Implementation 12.9. Other information material to decision Agreement are conditional on the satisfaction or waiver of in relation to the Merger certain conditions including the following: • Regulatory Modifications: before the commencement At the date of this Explanatory Memorandum there is no of the Meeting, ASIC and the ASX have granted the information which is material to the making of a decision Regulatory Modifications or indicated in writing that in relation to the Merger that is within the knowledge of such a modification, waiver or confirmation is not any Cromwell Director or director of any related body required; corporate which has not been either previously disclosed to • CPF Unitholder approval: the Resolutions are approved Merger Participants or which is set out in this Explanatory at the Meeting; Memorandum. • No restraints: as at 9:00am on the Effective Date, no So far as is known by the Cromwell Directors the only temporary restraining order, injunction or other legal material changes to the financial position of CPF since the restraint or prohibition in relation to the Merger which date of the last financial statements sent to CPF Unitholders has been enacted, enforced or issued by a Regulatory in accordance with section 314 or 317 of the Corporations Act Authority, is in effect; are as set out in this Explanatory Memorandum. • Independent Expert’s Report: CPF RE receives the Independent Expert’s Report stating that the Merger is 12.10. Undertakings by Cromwell in the best interests of, the Merger Participants and the Independent Expert does not change that conclusion Merger Consideration before the commencement of the Meeting; The Merger Implementation Agreement contains a condition • Independent Subcommittee: the Independent precedent that the Cromwell Securities which are to be Subcommittee unanimously recommends that CPF issued pursuant to the Scheme be approved by the ASX. Unitholders approve the Resolutions and do not change that recommendation or support a Superior Proposal at Merger implementation or before the Meeting; Cromwell will observe and perform all obligations • No Material Adverse Change: no CPF Material Adverse contemplated of it under the Merger and the Merger Change or Cromwell Material Adverse Change occurs Implementation Agreement including, without limitation, the between the date of the Merger Implementation ; obligation to provide the Merger Consideration in accordance • No Prescribed Occurrence: no CPF Prescribed with the terms of the Merger. Occurrence or Cromwell Prescribed Occurrence Enter into the Deed Polls occurs between the date of the Merger Implementation Agreement and 9:00am on the Effective Date; In the Merger Implementation Agreement Cromwell is obliged to enter into the Deed Polls that are summarised • Representations and warranties: certain in Section 12.13 on page 63. representations and warranties of CCL, CDPT RE and CPF RE set out in the Merger Implementation Cromwell has entered into those Deed Polls. Agreement remain true and correct in all respects at given times; • ASX quotation: the New Cromwell Securities have been approved for quotation and trading on a normal basis from the Implementation Date; and • Certificate: CCL and CDPT RE provides to CPF a certificate in the form set out in the Merger Implementation Agreement and signed by two directors of Cromwell on or before the date of despatch of the Explanatory Memorandum.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 61 (Obligations of the parties) CCL, CDPT RE and CPF RE (Reimbursement of costs) CPF RE must pay Cromwell must take all steps reasonably necessary to propose and certain costs up to a maximum of $200,000 should CPF RE implement, or assist in the proposal and implementation of, decide not to proceed with the Merger following execution of the Merger. They and their subsidiaries must also conduct the Merger Implementation Agreement because: their businesses in the ordinary course. CCL, CDPT RE • CPF RE supports a CPF Competing Proposal; or and CPF RE must provide the other parties to the Merger Implementation Deed any further or new information after • CPF RE does not proceed with the Merger for any other the Explanatory Memorandum has been dispatched until reason (other than as a result of an act or omission by the Effective Date where it would be necessary to ensure Cromwell). that the CPF or Cromwell Information is not materially false, misleading or deceptive. 12.12. Summary of Deed Polls (Termination) The Merger Implementation Agreement may CCL and CDPT RE have each executed a Deed Poll in favour be terminated in the following circumstances: of the Merger Participants under which each of CCL and • any of the conditions precedent are not satisfied or CDPT RE covenant that it will observe and perform all waived by the date (if any) specified for satisfaction or obligations contemplated of it under the Merger and the if the Merger has not been implemented by the end Merger Implementation Agreement. Such obligations include date and the parties cannot agree to extend that date or without limitation, the obligation of CCL and CDPT RE to determine an alternative means or method); provide the Merger Consideration in accordance with the terms of the Merger. • by Cromwell providing notice in writing to CPF RE where: › CPF RE is in material breach of its obligations The obligations of CCL and CDPT RE under the Deed Polls under the Merger Implementation Agreement or are subject to the coming into effect of the Supplemental the CPF RE has not procured that the Independent Deed and will terminate automatically if the Merger is Subcommittee recommend that CPF Unitholders terminated. vote in favour of the Merger and the breach Copies of the Deed Polls are included in this Explanatory continues to exist five Business Days from the date Memorandum as Annexure 8 on page 177. of the notice; › there is a material breach of any of the CPF warranties unless it was disclosed to Cromwell or its representatives or known to Cromwell prior to the execution of the Merger Implementation Agreement; and › the Independent Subcommittee changes its recommendation in relation to the Merger, or it or any member of that committee otherwise makes a public statement that indicates or suggest that the Merger is no longer recommended or that, he or she supports a Superior Proposal. • by CPF RE providing notice in writing to Cromwell where: › Cromwell is in material breach of its obligations under the Merger Implementation Agreement and the breach continues to exist five Business Days from the date of the notice; › there is a material breach of any of the Cromwell warranties unless it was disclosed to CPF RE or its representatives or known to CPF RE prior to the execution of the Merger Implementation Agreement; and › the Independent Subcommittee changes its recommendation in relation to the Merger, or it or any member of that committee otherwise makes a public statement that indicates or suggest that the Merger is no longer recommended or that, he or she supports a Superior Proposal.
62 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 12.13. Summary of Supplemental Deed to 12.15. Anti-Money Laundering (AML) amend CPF Constitution Under the CPF Constitution (as amended by the If the Merger is approved, CPF RE will execute the Supplemental Deed), each CPF Unitholder agrees to provide Supplemental Deed to amend the CPF Constitution in to CPDT RE such information as CDPT RE may reasonably order to facilitate the implementation of the Merger. The require to comply with any law in respect of the CDPT, Supplemental Deed will only take effect after it is lodged with including information required to meet obligations under the ASIC. Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth). Under the CPF Constitution (as amended by the Supplemental Deed): • CPF RE will have the power to do all things which it considers necessary or desirable to give effect to the Merger and the transactions contemplated of it; and • CPF Unitholders appoint CPF RE as their attorney with the power to do all things on their behalf which it considers necessary or desirable to give full effect to the terms of the Merger and the transactions contemplated of it. A copy of the Supplemental Deed is included in this Explanatory Memorandum as Annexure 7 on page 163.
12.14. Privacy Cromwell, which includes CPSL, complies with the Privacy Act 1988 and is bound by the National Privacy Principles governing the handling of personal information. Cromwell has adopted a privacy policy which can be obtained from its website or from its privacy officer. This Section summarises Cromwell’s information handling practices which are detailed in the privacy policy. Information collected by Cromwell is used primarily to enable Cromwell to record and maintain relevant details about investors, service providers and others it deals with to facilitate payments, to enable corporate communications and to promote Cromwell’s products and services. If related entities or service providers assist Cromwell to do those things, then Cromwell may disclose personal information to them. Information about an investor may also be provided to their nominated financial advisor. Cromwell makes reasonable efforts to ensure the confidentiality and security of records covering personal information. If personal information is requested on a proxy form, or other form associated with voting, but not provided then Cromwell may not be able to accept your vote. Cromwell has appointed a privacy officer who is responsible for the management of the Cromwell Property Group’s privacy policy and procedures and is the contact person in relation to privacy issues. Investors are able to gain access to personal information about them collected Cromwell by contacting the privacy officer. Further information can be obtained by contacting: The Privacy Officer Cromwell Property Securities Limited Telephone: 1300 276 693 or (07) 3225 7777 Fax: (07) 3225 7788
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 63 13. Definitions and Interpretation
Set out below are definitions of certain terms used in this Explanatory Memorandum. The Independent Expert’s Report also uses defined terms which may, or may not, be the same as those below. Any defined terms used in the Independent Expert’s Report can be found in Annexure A of the Independent Expert’s Report.
ASIC Australian Securities and Investments Commission. ASX ASX Limited ABN 98 008 624 691. ASX Listing Rules The Official Listing Rules of the ASX. Bank Loan The loan from the CPF’s financier secured by the CPF Properties. Business Day A day that is both a business day as defined in the ASX Listing Rules and a week day on which trading banks are open for business in Sydney, Australia. CCL Cromwell Corporation Limited ABN 44 001 056 980. CCL Shareholder A holder of CCL Shares. CCL Shares Fully paid ordinary shares in CCL. CDPT Cromwell Diversified Property Trust ARSN 102 982 598. CDPT RE Cromwell Property Securities Limited ABN 11 079 147 809 in its capacity as responsible entity of CDPT. CDPT Unitholder A holder of CDPT Units. CDPT Units Fully paid ordinary units in CDPT. Chairman The chairman appointed for the purposes of the Meeting. Combined Cromwell In respect of references to Cromwell (or Cromwell Property Group) in this Explanatory Memorandum which relate to times or the state of affairs after implementation of the Merger, the economic entity resulting from the Merger being CCL, CDPT and CPF and each of their related bodies corporate and any entities controlled by them, unless the context otherwise requires. Combined Properties If the Merger is implemented, the properties owned by Combined Cromwell, which would include the Cromwell Properties and the CPF Properties. Corporations Act Corporations Act 2001 (Cth). CPF or Fund Cromwell Property Fund ARSN 119 080 410. CPF Constitution The constitution establishing CPF dated 12 April 2006, as amended from time to time. CPF Directors A director of CPF RE in office at the date of lodgement of this Explanatory Memorandum with ASIC as listed in Section 8 on page 48. CPF External Unitholders CPF Unitholders excluding Cromwell. CPF Information Information in this Explanatory Memorandum which has been prepared by CPF RE, being all the information excluding the Cromwell Information, the Investigating Accountant’s Report, the Independent Expert’s Report and the Taxation Report. CPF Properties The properties owned by CPF, and set out in Section 6.3, being the Edinburgh Park Property, Hurstville Property, Prospect Property, Smithfield Property and the Woden Property. CPF RE Cromwell Property Securities Limited ABN 11 079 147 809 in its capacity as responsible entity of CPF. CPF Register The register of holders of CPF Units from time to time and as administered by CPF RE or the CPF Registry, as applicable. CPF Registry Boardroom Pty Limited ABN 14 003 209 836. CPF Unitholder A holder of CPF Units. CPF Unit Fully paid ordinary unit issued in CPF. CPSL Cromwell Property Securities Limited ABN 11 079 147 809. Cromwell Director A director of CCL and CPSL in office at the date of lodgement of this Explanatory Memorandum with ASIC as listed in Section 7.10.1. on page 44. Cromwell or Cromwell Property Group In respect of references to Cromwell (or Cromwell Property Group) in this Explanatory Memorandum which relate to times or the state of affairs before implementation of the Merger, CCL and CDPT and each of their related bodies corporate and any entities controlled by them, unless the context otherwise requires. For ease of reference, certain references to Cromwell are in fact references to CDPT RE or CCL.
64 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Information Information in this Explanatory Memorandum which has been prepared by Cromwell, being the information in Section 7 on page 38 and Section 9 on page 49 including the information in those sections which has been prepared by Cromwell based on information provided to Cromwell by CPF RE. Cromwell Loans The Cromwell Industrial Land Loan and the Cromwell Property Loan. Cromwell Industrial Land Loan The loan provided to CPF by Cromwell to assist in funding the Industrial Land. Cromwell Property Loan The loan provided to CPF by Cromwell to assist in funding the CPF Properties. Cromwell Properties The properties owned by CDPT, prior to the Merger being those properties set out in Section 7.5. on page 41. Cromwell Registry Link Market Services Limited ABN 54 083 214 537. Cromwell Securities CDPT Units stapled to CCL Shares. This includes Cromwell Securities already on issue and also, where the context requires, Cromwell Securities to be issued to Merger Participants as Merger Consideration. Cromwell Securityholder A holder of Cromwell Securities. Custodian A person who holds one or more parcels of CPF Units as trustee or nominee for, otherwise on account of, another person, and who is not a Foreign Investor. Deed Polls The deed polls entered into by CDPT RE and CCL respectively in favour of Merger Participants. Effective Date The date on which CPSL lodges the Supplemental Deed with ASIC (expected to be the Business Day immediately following the date of the Meeting). Edinburgh Park Property Sturton Road, Edinburgh Park, SA 5111, one of the CPF Properties. EPS Operating Earnings per Cromwell Security or Operating Earnings per CPF Unit as the context requires. Exhibition Street Property 321 Exhibition Street, Melbourne, VIC 3000, one of the Cromwell Properties. Explanatory Memorandum This document, including all of the Annexures and the Proxy Form. Financial Information The financial information in this Explanatory Memorandum in relation to CPF, Cromwell or Combined Cromwell as applicable. Foreign Investor Any CPF Unitholder who on the Record Date has an address on the Register which is outside Australia and New Zealand. Foreign Investor Facility Nominee RBS Morgans Limited ABN 49 010 669 726. FY or Financial Year A financial year, being a 12 month period ending on 30 June of that year. GST Has the meaning given to that term in the A New Tax System (Goods and Services Tax) Act 1999 (as amended from time to time). Hurstville Property 43 Bridge Street, Hurstville, NSW 2220, one of the CPF Properties. Implementation Date The date on which the Merger is to be implemented (expected to be on or about Thursday 4 October 2012). Independent Directors The CPF Directors who are independent being: • Geoff Levy • Michelle cKellar • David Usasz • Robert Pullar • Richard Foster Independent Expert Deloitte Corporate Finance Pty Limited ABN 19 003 833 127. Independent Expert’s Report The report prepared by the Independent Expert, a copy of which is set out in Annexure 3 on page 83. Industrial Land The Edinburgh Park Property currently owned by CPF and other vacant industrial land previously owned by CPF. Investigating Accountant JR Securities Limited ABN 99 054 784 619. Investigating Accountant’s Report The report prepared by the Investigating Accountant, a copy of which is set out in Annexure 1 on page 68. LVR The loan to value ratio derived by dividing the amount of a loan by the value of property pledged as security for that loan.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 65 Management Costs The amount payable for administering the CDPT, including management fees and expenses (as specified in Annexure 4 on page 157). Meeting The meeting of CPF Unitholders to be held at 1pm on Wednesday 3 October 2012. Merger The arrangement under which Cromwell acquires all of CPF Units it does not already own in return for providing the Merger Consideration, which is facilitated by amendments to CPF Constitution as set out in the Supplemental Deed. Merger Consideration The Cromwell Securities issued by Cromwell in return for the transfer to Cromwell of all the CPF Units it does not already own pursuant to the Merger. The Cromwell Securities to be issued will be determined by reference to the Merger Ratio. Merger Implementation Agreement The Merger Implementation Agreement between CCL, CDPT RE and CPF RE dated 31 August 2012, as amended from time to time, a summary of which is in Section 12 on page 60. Merger Participant A CPF Unitholder on the Record Date, except Cromwell and Foreign Investors. Merger Ratio 0.2298 Cromwell Securities for each CPF Unit on issue at the Implementation Date. Notice of Meeting The notice of meeting of CPF Unitholders set out in Annexure 5 on page 160. NTA or Net Tangible Assets Net assets less intangible assets. Operating Earnings Net profit after tax adjusted for certain items as set out in Section 9 on page 49. Prospect Property 19 Stoddart Road, Prospect, NSW 2148, one of the CPF Properties. Proposed Transaction This term is used (and defined) in the Independent Expert’s Report to refer to the Merger. Proxy Form The form by which CPF Unitholders may vote on the Resolutions without attending the Meeting in person. Record Date 5pm Monday 1 October 2012. CPF Unitholders on the CPF Register as at this date will be entitled to participate in the Merger (if implemented) and their entitlement to Merger Consideration will be determined by reference to the number of CPF Units they hold as at this date. Regulatory Authorities A government, semi-governmental, administration, fiscal or judicial body, department, commission, authority, tribunal, agency or entity whether foreign, federal, state, territorial or local. Resolutions Means the resolutions to be considered by CPF Unitholders at the Meeting to: • approve the acquisition by CDPT RE of all of the CPF Units it does not already own for all purposes; and • amend the CPF Constitution to facilitate implementation of the Merger, as set out in the Notice of Meeting. Risk Factors Those risk factors set out in Section 5 on page 30 and Section 10 on page 56. Smithfield Property 28-54 Percival Road, Smithfield, NSW 2164, one of the CPF Properties. Superior Proposal Has the meaning given to that term in the Merger Implementation Agreement. Supplemental Deed The Supplemental Deed at Annexure 7 on page 163 which, if the Merger is approved by CPF Unitholders, will be executed by CPF RE and lodged with ASIC to give effect to the amendments to CPF Constitution and allow the implementation of the Merger. Taxation Report The report prepared by Minter Ellison set out in Annexure 2 on page 77. TGA Property 136 Narrabundah Lane, Symonston, ACT 2609, one of the Cromwell Properties. Transaction Costs The transaction costs incurred by either CDPT RE or CPF RE (as applicable) in relation to the Merger and more particularly described in Section 4.6.2 on page 25. VWAP Volume weighted average price, calculated by dividing the total value of Cromwell Securities trading in a given period by the total volume of Cromwell Securities traded for that period. WALE Weighted average lease expiry. With respect to a property or portfolio, the number of years derived by multiplying the amount of current income from each lease at the calculation date by the remaining term of that lease and dividing the resulting amount by the total current income for the property or portfolio. Woden Property 13 Keltie Street, Woden, ACT 2606, one of the CPF Properties. you or your A CPF Unitholder.
66 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 14. Corporate Directory
CPF Registry Registered Office of Boardroom Pty Limited Cromwell Property Securities Limited
Street Address: Street Address: Level 7 Level 19 207 Kent Street 200 Mary Street SYDNEY NSW 2000 BRISBANE QLD 4000
Postal Address: Postal Address: GPO Box 3993 GPO Box 1093 Sydney NSW 2001 BRISBANE QLD 4001
Tel: 1300 737 760 Tel: (07) 3225 7777 Fax: (02) 9279 0664 Fax: (07) 3225 7788 Web: www.boardroomlimited.com.au Web: www.cromwell.com.au
Cromwell Registry Listing Cromwell Property Group is listed on the Australian Link Market Services Limited Securities Exchange (ASX: CMW)
Street Address: Level 12 CPF Investor 680 George Street SYDNEY NSW 2000 and Advisor Enquiries Cromwell Investor Services – 1300 276 693 Postal Address: Web: www.cromwell.com.au/cpfmerger Locked Bag A14 Sydney South NSW 1235
Tel: 1300 550 841 Fax: (02) 9287 0303 Web: www.linkmarketservices.com.au
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 67 Annexure 1 Investigating Accountant’s Report
68 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
31 August 2012
Board of Directors Cromwell Property Securities Limited as responsible entity for Cromwell Property Fund GPO Box 1093 BRISBANE QLD 4001
Dear Directors
INVESTIGATING ACCOUNTANT’S REPORT ON HISTORICAL, PRO FORMA AND FORECAST FINANCIAL INFORMATION
1. INTRODUCTION
We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma and forecast financial information of Cromwell Property Fund (“CPF”) for inclusion in the Explanatory Memorandum (“EM”) to be dated on or about 22 August 2012. The EM is to be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group (“Cromwell”), except for the units in CPF already held by Cromwell (the “Merger”).
Expressions defined in the EM have the same meaning in this report.
The nature of this report is such that it should be given by an entity which holds an Australian financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), which is owned by the partners of Johnston Rorke, holds the appropriate Australian financial services licence. This report is accompanied by a Financial Services Guide, attached as Appendix A.
2. SCOPE
JR Securities has been requested to prepare this Report to cover the following financial information:
Historical Financial Information
The historical financial information, as set out in the EM comprises: - the Income Statement of CPF for the years ended 30 June 2011 and 2012; and - the balance sheet of CPF as at 30 June 2012.
(Hereafter the “Historical Financial Information”).
The Historical Financial Information for the years ended 30 June 2011 and 2012 has been extracted from the audited statutory financial statements, which were audited by Johnston Rorke and on which unqualified audit opinions were issued.
Liability limited by a scheme approved under Professional Standards Legislation
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 69
31 August 2012
Pro Forma Historical Financial Information
Board of Directors The pro forma historical information as set outCromwell in the Property EM Securities comprises Limited as :responsible entity for Cromwell Property Fund - the actual balance sheets of CPF andGPO BoxCromwel 1093 l as at 30 June 2012, and the pro forma BRISBANE QLD 4001 balance sheet of Combined Cromwell as though the Merger had occurred at 30 June 2012; and Dear Directors - the pro forma Income Statement of Combined Cromwell for the year ended 30 June 2012 as
though the Merger had occurred on 1 July I2011NVESTIGATING. ACCOUNTANT’S REPORT ON HISTORICAL, PRO FORMA AND FORECAST FINANCIAL INFORMATION
(Hereafter the “Pro Forma Historical Financial Information”). 1. INTRODUCTION
We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma Forecast Financial Information and forecast financial information of Cromwell Property Fund (“CPF”) for inclusion in the Explanatory Memorandum (“EM”) to be dated on or about 22 August 2012. The EM is to be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group The forecast financial information as set out in(“Cromwell”) section, except 9.5 for theof unitsthe in EMCPF already comprises: held by Cromwell (the “Merger”).
- the forecast Income Statement of CPFExpression for thes defined year in the e ndingEM have the 30 same June meaning 2013; in this report. and
- the forecast Income Statement of CombinedThe nature of this Cromwell report is such thatfor it shouldthe beyear given endingby an entity which30 Juneholds an Australian2013 financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), assuming Cromwell acquires all the whichunits is ownedin CPF by the aspartners at of30 Johnston September Rorke, holds the2012 appropriate (the Australian expected financial implementation date if the Merger proceedsservices licence.). This report is accompanied by a Financial Services Guide, attached as Appendix A.
(Hereafter “the Forecast Financial Information”).2. S COPE
JR Securities has been requested to prepare this Report to cover the following financial information: The Forecast Financial Information is based on the assumptions outlined in section 9.6 of the EM. Historical Financial Information
The historical financial information, as set out in the EM comprises: (Collectively, the above information is referred to- theas Income the Statement“Financial of CPF forInform the yearsation”). ended 30 June 2011 and 2012; and - the balance sheet of CPF as at 30 June 2012.
(Hereafter the “Historical Financial Information”). The Financial Information is presented in an abbreviated form insofar as it does not include all of the presentation and disclosures required by AustralianThe Historical Financial Accounting Information for theStandards years ended 30 Juneand 2011 other and 2012 mandatory has been extracted from the audited statutory financial statements, which were audited by Johnston Rorke and on which professional reporting requirements applicableunqualified to general audit opinions purpose were issued. financial reports.
Liability limited by a scheme approved under Professional Standards Legislation 3. DIRECTORS RESPONSIBILITY FOR THE FINANCIAL INFORMATION
The Directors of Cromwell Property Securities Limited, as the responsible entity for CPF, have prepared and are responsible for the preparation and presentation of the Financial Information. The Directors are also responsible for the determination of the best-estimate assumptions and proposed transaction as set out in section 9 of the EM.
4. OUR RESPONSIBILITY
Historical and Pro Forma Historical Financial Information
Our responsibility is to express a conclusion on the Historical and Pro Forma Historical Financial Information based on our review.
We have conducted an independent review of the Historical and Pro Forma Historical Financial Information in order to state whether on the basis of the procedures described, anything has come to our attention that would cause us to believe that:
(i) The Historical Information does not present fairly: - the Income Statement of CPF for the financial years ended 30 June 2011 and 2012; and - the Balance Sheet of CPF as at 30 June 2012.
in accordance with the measurement and recognition requirements (but not all the presentation and disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia.
70 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
31 August 2012
(ii) The Pro Forma adjustments and assumptions , set out in sections 9.3 and 9.6, do not provide a Board of Directors reasonable basis for the Pro Forma HistoricalCromwell Financial Property Securities Information; Limited as responsible entity for Cromwell Property Fund GPO Box 1093 BRISBANE QLD 4001 (iii) The Pro Forma Historical Financial Information has not been prepared on the basis of the Pro Forma adjustments and assumptions set out in sections 9.3 and 9.6 of the EM; Dear Directors
(iv) The Pro Forma Historical Financial InformationINVESTIGATING does not ACCOUNTANT present’S RfairlyEPORT theON H ISTORICALPro Forma, PRO F ORMABalance Sheet of Combined Cromwell as at 30 June 2012, assumingAND FORECAST the F INANCIALMerger INFORMATION had occurred at that
date, in accordance with the measurement and recognition requirements (but not all of the 1. INTRODUCTION presentation and disclosure requirements) of applicable Accounting Standards and other We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma mandatory professional reporting requirementsand forecast in financial Australia information ofas Cromwell if the Property Pro Fund Forma (“CPF”) for adjustments inclusion in the Explanatory set out in section 9.3 of the EM had occurred Memorandumat 30 June (“EM” )2 to012. be dated on or about 22 August 2012. The EM is to be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group (“Cromwell”), except for the units in CPF already held by Cromwell (the “Merger”).
(v) The Pro Forma Historical Financial InformationExpressions defineddoes in thenot EM havepresent the same meaningfairly in thethis report. Pro Forma Income
Statement of Combined Cromwell for theThe year nature endingof this report 30 is such June that it 2012,should be assuminggiven by an entity the which Merger holds an Australian had financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), occurred on 1 July 2011, in accordance withwhich theis owned measurement by the partners of Johnstonand recog Rorke, holdsnition the appropriaterequirements Australian financial (but services licence. This report is accompanied by a Financial Services Guide, attached as Appendix not all of the presentation and disclosureA. requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro Forma
assumptions set out in section 9.6 of the EM2. S COPEhad occurred during the year ending 30 June 2012.
JR Securities has been requested to prepare this Report to cover the following financial information:
Our independent review of the HistoricalHistorical and FinancialPro FormaInformation Historical Financial Information has
been conducted in accordance with AustralianThe historical Auditing financial information, and asAssurance set out in the EM comprises:Standards applicable to review engagements. Our procedures consists- the Income of reading Statement of CPFof forrelevant the years ended Board 30 June 2011minutes, and 2012; andcontracts - the balance sheet of CPF as at 30 June 2012. and other legal documents, inquiries of management personnel and the Directors and analytical (Hereafter the “Historical Financial Information”). and other procedures applied to CPF’s and Cromwell’s accounting records. These procedures do The Historical Financial Information for the years ended 30 June 2011 and 2012 has been extracted not provide all the evidence that would frombe the required audited statutory in financial an statements,audit, whichthus were the audited level by Johnston of Rorkeassurance and on which unqualified audit opinions were issued. provided is less than that given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion on the Historical and Pro Forma Historical Financial Information. Liability limited by a scheme approved under Professional Standards Legislation Forecast Financial Information
Our responsibility is to express a conclusion on the Forecast Financial Information based on our review.
We have conducted an independent review of the Forecast Financial Information in order to state whether on the basis of the procedures described, anything has come to our attention that would cause us to believe that:
(i) The Directors’ best-estimate assumptions do not provide a reasonable basis for the preparation of the Forecast Financial Information;
(ii) The Forecast Financial Information was not prepared on the basis of the best-estimate assumptions;
(iii) The Forecast Financial Information does not present fairly: - the forecast Income Statement of CPF for the year ending 30 June 2013; and - the forecast Income Statement of Combined Cromwell for the year ending 30 June 2013 assuming the Merger implementation date of 30 September 2012
in accordance with the recognition and measurement requirements (but not all of the presentation and disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia; and
(iv) The Forecast Financial Information is unreasonable.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 71
31 August 2012
The Forecast Financial Information has been prepared by the Directors to provide investors with Board of Directors a guide to both CPF and Combined Cromwell’sCromwell Property potential Securities Limited future as responsible financial entity for performance based Cromwell Property Fund upon the achievement of certain economic,GPO Box operating, 1093 development and trading assumptions BRISBANE QLD 4001 about future events and actions that have not yet occurred and may not necessarily occur. There is a considerable degree of subjective judgement involved in the preparation of the Forecast Dear Directors Financial Information. Actual results may vary materially from this Forecast Financial Information
and the variation may be materially positive orINVESTIGATING negative. ACCOUNTANT Accordingly,’S REPORT unitholders ON HISTORICAL , PshouldRO FORMA have regard to the Risk Factors set out in section 10 of the EM.AND FORECAST FINANCIAL INFORMATION
1. INTRODUCTION Our independent review of the Forecast Financial Information has been conducted in accordance We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma with Australian Auditing and Assuranceand Standards forecast financial informationapplicable of Cromwell to Property review Fund (“CPF”) engagements. for inclusion in the Explanatory Our procedures consist of reading of relevantMemorandum Board minutes,(“EM”) to be da tedcontracts on or about 22 and August other2012. The legal EM is to documents,be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group inquiries of management personnel and(“Cromwell”) the Directors,, except for the units the in CPF analytical already held by Cromwelland (totherhe “Merger” procedures).
applied to CPF and Cromwell’s accountingExpression records.s defined in theThese EM have theprocedures same meaning in thisdo report. not provide all the
evidence that would be required in an audit,The thusnature of the this reportlevel is suchof assurancethat it should be givenprovided by an entity is which less holds than an Australian that financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), given in an audit. We have not performedwhich an isaudit owned byand, the partnersaccordingly, of Johnston Rorke,we doholds notthe appropriate express Australian an audit financial opinion on the Forecast Financial Information.services licence. This report is accompanied by a Financial Services Guide, attached as Appendix A.
2. SCOPE
5. CONCLUSION JR Securities has been requested to prepare this Report to cover the following financial information:
Historical Financial Information Review conclusion on Historical and Pro Forma Historical Information The historical financial information, as set out in the EM comprises: - the Income Statement of CPF for the years ended 30 June 2011 and 2012; and - the balance sheet of CPF as at 30 June 2012. Based on our independent review, which is not an audit, nothing has come to our attention which (Hereafter the “Historical Financial Information”). causes us to believe that: The Historical Financial Information for the years ended 30 June 2011 and 2012 has been extracted from the audited statutory financial statements, which were audited by Johnston Rorke and on which (i) The Historical Financial Information doesunqualified not present audit opinions fairly: were issued. - the Income Statement of CPF for the financial years ended 30 June 2011 and 2012; and
- the balance sheet of CPF as at 30 JuneLiability 2012 limited by a scheme approved under Professional Standards Legislation
in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia;
(ii) The Pro Forma adjustments and assumptions, set out in section 9.3 and 9.6, do not provide a reasonable basis for the Pro Forma Historical Financial Information;
(iii) The Pro Forma Historical Financial Information has not been prepared in the basis of the Pro Forma adjustments and assumptions set out in section 9.3 and 9.6 of the EM;
(iv) The Pro Forma Historical Information does not present fairly the Pro Forma Balance Sheet of Combined Cromwell as at 30 June 2012, assuming the Merger had occurred at that date, in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro Forma adjustments set out in section 9.3 of the EM has occurred at 30 June 2012.
(v) The Pro Form Historical Financial Information doe not present fairly the Pro Forma Income Statement of Combined Cromwell for the year ending 30 June 2012, assuming the Merger had occurred on 1 July 2011, in accordance with the measurement and recognition requirements (but not all of the presentation and disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro Forma assumptions set out in section 9.6 of the EM had occurred during the year ending 30 June 2012.
72 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
31 August 2012
Emphasis of Matter – CPF Continuation as a Going Concern
Board of Directors We draw attention to section 9.3 of the EMCromwell under Property the Securities heading Limited “CPFas responsible – Ongoingentity for Operations”. The Cromwell Property Fund CPF balance sheet at 30 June 2012 showsGPO that Box 1093current liabilities ($33,765,000) exceeded current BRISBANE QLD 4001 assets ($3,033,000) by $30,732,000. These conditions, along with other matters set out in section 9.3, indicate the existence of a material uncertainty which may cast significant doubt over CPF’s Dear Directors ability to continue as a going concern if the Merger does not occur and, therefore, whether CPF will realise its assets and extinguish its liabilities in theINVESTIGATING normal AcourseCCOUNTANT of’S RbusinessEPORT ON H ISTORICALand at, PtheRO F ORMAamounts stated in the balance sheet set out in section 9.3 of the EM.AND FORECAST FINANCIAL INFORMATION
1. INTRODUCTION
We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma Review conclusion on Forecast Financial andInformation forecast financial information of Cromwell Property Fund (“CPF”) for inclusion in the Explanatory Memorandum (“EM”) to be dated on or about 22 August 2012. The EM is to be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group Based on our review of the Forecast Financial(“Cromwell”) Information,, except for the unitswhich in CPF isalready not held an by Cromwellaudit, (t heand “Merger” based). on an investigation of the reasonableness of the ExpressionDirectors’s defined best in the -EMestimate have the same assumptions meaning in this report. given rise to the prospective financial information, nothing hasThe come nature of to this our report attention is such that it whichshould be causesgiven by an entityus towhich believe holds an Australianthat: financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), which is owned by the partners of Johnston Rorke, holds the appropriate Australian financial (i) The Directors’ best-estimate assumptionsservices do licence.not provideThis report is aaccompanied reasonable by a Financial basis Services for Guide, the attached preparation as Appendix A. of the Forecast Financial Information;
2. SCOPE
(ii) The Forecast Financial Information wasJR Securities not hasprepared been requested onto prepare the this Reportbasis to coverof thethe following best financial-estimate information: assumptions; Historical Financial Information
The historical financial information, as set out in the EM comprises: (iii) The Forecast Financial Information does not- the present Income Statement fairly: of CPF for the years ended 30 June 2011 and 2012; and - the balance sheet of CPF as at 30 June 2012. - the forecast Income Statement of CPF for the year ending 30 June 2013; and (Hereafter the “Historical Financial Information”). - the forecast Income Statement of Combined Cromwell for the year ended 30 June 2013 assuming the Merger implementationThe dateHistorical of Financial 30 September Information for the years2012 ended 30 June 2011 and 2012 has been extracted from the audited statutory financial statements, which were audited by Johnston Rorke and on which unqualified audit opinions were issued. in accordance with the recognition and measurement requirements (but not all of the
presentation and disclosure requirements)Liability limited byof a scheme applicable approved under Professional Accounting Standards Legislation Standards and other
mandatory professional reporting requirements in Australia; and
(iv) The Forecast Financial Information is unreasonable.
The best-estimate assumptions, set out in section 9.6 of the EM, are subject to significant uncertainties and contingencies often outside the control of CPF, Cromwell and the Directors. If events do not occur as assumed, actual results achieved and distributions provided by CPF and Combined Cromwell may vary significantly from the Forecast Financial Information. Accordingly, we do not confirm or guarantee the achievement of the Forecast Financial Information, as future events, by their very nature, are not capable of independent substantiation.
We disclaim any assumption of responsibility for any reliance on the Report or on the Financial Information to which the Report relates for any purpose other than the purpose for which it was prepared. This Report should be read in conjunction with the EM.
6. SUBSEQUENT EVENTS
Apart from the matters dealt with in this Report, and having regard to the scope of our Report, to the best of our knowledge and belief, no material transactions or events outside of the ordinary business of CPF and Cromwell have come to our attention that would require comment on, or adjustment to, the information referred to in our Report or that would cause such information to be misleading or deceptive.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 73
31 August 2012
Board of Directors 7. INDEPENDENCE OR DISCLOSURE OF INTERESTCromwell Property Securities Limited as responsible entity for Cromwell Property Fund GPO Box 1093 BRISBANE QLD 4001 JR Securities does not have any pecuniary interest that could reasonably be regarded as being capable of affecting its ability to give an unbiased conclusion in this matter. Johnston Rorke provides Dear Directors audit and other assurance services to CPF and Cromwell, and JR Securities will receive a
professional fee for the preparation of this Report.INVESTIGATING Consent ACCOUNTANT to the’ S inclusionREPORT ON H ISTORICALof the , InvestigatingPRO FORMA Accountant’s Report in the EM in the form and context in whichAND FORECAST it appears, FINANCIAL hasINFORMATION been given. At the
date of this Report, this consent has not been withdrawn. 1. INTRODUCTION
We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma Yours faithfully and forecast financial information of Cromwell Property Fund (“CPF”) for inclusion in the Explanatory Memorandum (“EM”) to be dated on or about 22 August 2012. The EM is to be issued by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group (“Cromwell”), except for the units in CPF already held by Cromwell (the “Merger”).
Expressions defined in the EM have the same meaning in this report.
The nature of this report is such that it should be given by an entity which holds an Australian financial services licence under the Corporations Act 2001. JR Securities Limited (“JR Securities”), ROSS WALKER which is owned by the partners of Johnston Rorke, holds the appropriate Australian financial Director and Representative services licence. This report is accompanied by a Financial Services Guide, attached as Appendix A. JR Securities Limited
2. SCOPE
JR Securities has been requested to prepare this Report to cover the following financial information:
Historical Financial Information
The historical financial information, as set out in the EM comprises: - the Income Statement of CPF for the years ended 30 June 2011 and 2012; and - the balance sheet of CPF as at 30 June 2012.
(Hereafter the “Historical Financial Information”).
The Historical Financial Information for the years ended 30 June 2011 and 2012 has been extracted from the audited statutory financial statements, which were audited by Johnston Rorke and on which unqualified audit opinions were issued.
Liability limited by a scheme approved under Professional Standards Legislation
74 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
31 August 2012
THIS FINANCIAL SERVICES GUIDE FORMS PART OF THE INVESTIGATING ACCOUNTANT’S REPORT
FINANCIAL SERVICES GUIDE
1. About us
JR Securities Limited (ABN 99054784619, Australian Financial Services Licence no 255516) (“JR Securities”) has been engaged by Cromwell Property Securities Limited as the responsible entity for Cromwell Property Fund (“CPF”) to provide a report in the form of an Investigating Accountants Report in relation to the proposed acquisition of all the issued units on CPF by Cromwell Property Group (“Cromwell”), except for the units in CPF already held by Cromwell.
You have not engaged us directly but have been provided with a copy of the Report as a retail client because of your connection to the matters set out in the Report.
2. The Financial Services Guide
This Financial Services Guide (“FSG”) is designed to assist retail clients in their use of an general financial product advice contained in the Report. The FSG contains information about JR Securities generally, the financial services we are licensed to provide, the remuneration we may receive in connection with the preparation of the Report, and how complaints against us will be dealt with.
3. Financial services we are licensed to provide
Our Australian financial services licence allows us to provide a board range of services, including product advice in relation to various financial products such as securities, interests in managed investment schemes, superannuation products, stocks and bonds.
4. General financial product advice
The Report contains only general financial product advice. It was prepared without taking into account your personal objectives, financial situation or needs.
You should consider your own objectives, financial situation and needs when assessing the suitability of the Report to your situation. You may wish to obtain personal financial advice from the holder of an Australian Services Licence to assist you in this assessment.
5. Remuneration for our services
We charge fees for providing Reports. These fees have been agreed with, and will be paid by, the person who engaged us to provide a Report. Our fees for Reports are based on a time costs or fixed fee basis. Our Directors and employees providing financial services receive an annual salary or profit share depending in their level of seniority. The estimated fee for this Report is $40,000 (exclusive of GST).
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 75
31 August 2012
Board of Directors JR Securities is owned by the partners of JohnstonCromwell Rork Propertye, Securitieswhich Limitedis a asprofessional responsible entity foradvisory and accounting Cromwell Property Fund practice. Johnston Rorke may provide professionalGPO Box 1093services, including audit, tax and financial advisory services, to the person who engaged us and receiveBRISBANE fees QLD for 4001 those services. Johnston Rorke has historically
provided audit and other assurance services to CPF and Cromwell. Dear Directors
Except for the fees and benefits referred to above, JR Securities, including any of its Directors, employees or associated entities should not receive any fees or otherINVESTIGATING benefits, direACCOUNTANTctly or ’indirectly,S REPORT ON forHISTORICAL or in connection, PRO FORMA with AND FORECAST FINANCIAL INFORMATION the provision of a Report.
1. INTRODUCTION 6. Complaints process We have prepared this Investigating Accountant’s Report (the “Report”) on the historical, pro forma and forecast financial information of Cromwell Property Fund (“CPF”) for inclusion in the Explanatory If you have a complaint, please raise it with us first,Memorandum using ( “EMthe”) tocontact be dated on details or about 22listed August below. 2012. The WeEM is willto be issuedendeavour by CPF, in respect of the proposed acquisition of all the issued units in CPF by Cromwell Property Group to satisfactorily resolve your complaint in a timely(“Cromwell”) manner., except forIn the addition, units in CPF already a copy held by ofCromwell our (tinternalhe “Merger”). complaints
handling procedure is available upon request. Expressions defined in the EM have the same meaning in this report.
The nature of this report is such that it should be given by an entity which holds an Australian If we are not able to resolve your complaint to yourfinancial satisfaction services licence underwith the 45 Corporations days of Act your 2001. JRwritten Securities notification, Limited (“JR Securities”), you are entitled to have your matter referred to the Financialwhich is owned Ombudsman by the partners Serviceof Johnston (“FOS”),Rorke, holds anthe externalappropriate Australian complaints financial services licence. This report is accompanied by a Financial Services Guide, attached as Appendix resolution service. FOS can be contacted by callingA. 1300 780 808. You will not be charged for using the FOS
Service. 2. SCOPE
7. Contact Details JR Securities has been requested to prepare this Report to cover the following financial information:
Historical Financial Information JR Securities can be contacted by sending a letter to the following address: The historical financial information, as set out in the EM comprises: - the Income Statement of CPF for the years ended 30 June 2011 and 2012; and Nigel Fisher - the balance sheet of CPF as at 30 June 2012.
JR Securities Limited (Hereafter the “Historical Financial Information”).
The Historical Financial Information for the years ended 30 June 2011 and 2012 has been extracted Central Plaza One from the audited statutory financial statements, which were audited by Johnston Rorke and on which unqualified audit opinions were issued. Level 30, 345 Queen Street BRISBANE QLD 4000 Liability limited by a scheme approved under Professional Standards Legislation GPO Box 1144 BRISBANE QLD 4001
76 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 2 Taxation Report
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 77 78 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 79 80 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 81 82 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 3 Independent Expert’s Report
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 83
Cromwell Property Fund Independent expert’s report and Financial Services Guide 31 August 2012
84 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Financial Services Guide individual contribution to the organisation and covers all What is a Financial Services Guide? aspects of performance. We do not pay commissions or provide other benefits to This Financial Services Guide (FSG) provides anyone who refers prospective clients to us. important information to assist you in deciding whether to use our services. This FSG includes details Associations and relationships of how we are remunerated and deal with complaints. We are ultimately controlled by the Deloitte member firm Where you have engaged us, we act on your behalf when in Australia (Deloitte Touche Tohmatsu). Please see providing financial services. Where you have not www.deloitte.com/au/about for a detailed description of engaged us, we act on behalf of our client when providing the legal structure of Deloitte Touche Tohmatsu. these financial services, and are required to give you an FSG because you have received a report or other financial In 2010, Deloitte Corporate Finance Pty Limited prepared services from us. an independent expert’s report for Cromwell Property Securities Limited as responsible entity for Cromwell What financial services are we licensed to Diversified Property Trust, a member of the Cromwell provide? Property Group, in relation to the acquisition of certain assets from Cromwell Property Fund. We are authorised to provide general financial product The services were unrelated to the Proposed Transaction. advice or to arrange for another person to deal in financial products in relation to securities, interests in What should you do if you have a complaint? managed investment schemes and government debentures, stocks or bonds. If you have any concerns regarding our report or service, please contact us. Our complaint handling process is Our general financial product advice designed to respond to your concerns promptly and equitably. All complaints must be in writing to the Where we have issued a report, our report contains only address below. general advice. This advice does not take into account your personal objectives, financial situation or needs. If you are not satisfied with how we respond to your You should consider whether our advice is appropriate complaint, you may contact the Financial Ombudsman for you, having regard to your own personal objectives, Service (FOS). FOS provides free advice and assistance financial situation or needs. to consumers to help them resolve complaints relating to the financial services industry. FOS’ contact details are If our advice is provided to you in connection with the also set out below. acquisition of a financial product you should read the relevant offer document carefully before making any The Complaints Officer Financial Ombudsman Services decision about whether to acquire that product. PO Box N250 GPO Box 3 Grosvenor Place Melbourne VIC 3001 How are we and all employees remunerated? Sydney NSW 1220 [email protected] [email protected] www.fos.org.au We will receive a fee of approximately $65,000 exclusive Fax: +61 2 9255 8434 Tel: 1300 780 808 of GST in relation to the preparation of this report. This Fax: +61 3 9613 6399 fee is based on time spent at our normal hourly rates and is not contingent upon the success or otherwise of the What compensation arrangements do we proposed transaction between Cromwell Property Fund have? and Cromwell Property Group (the Proposed Transaction). Deloitte Australia holds professional indemnity insurance that covers the financial services provided by us. This Other than our fees, we, our directors and officers, any insurance satisfies the compensation requirements of the related bodies corporate, affiliates or associates and their Corporations Act 2001 (Cth). directors and officers, do not receive any commissions or other benefits. All employees receive a salary and while eligible for annual salary increases and bonuses based on overall performance they do not receive any commissions or other benefits as a result of the services provided to you. The remuneration paid to our directors reflects their
3 April 2012 Deloitte Corporate Finance Pty Limited, ABN 19 003 833 127, AFSL 241457 of Level 1 Grosvenor Place, 225 George Street, Sydney NSW 2000 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Member of Deloitte Touche Tohmatsu Limited
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 85
Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127 AFSL 241457
Riverside Centre Level 25 Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia
Tel: +61 (0) 7 3308 7000 Fax: +61 (0) 7 3308 7001 www.deloitte.com.au
The Directors Cromwell Property Securities Limited as responsible entity for Cromwell Property Fund Level 19 200 Mary Street Brisbane QLD 4000
31 August 2012
Dear Directors
Independent expert’s report Introduction Cromwell Property Fund (CPF or the Fund) is an open-ended unlisted diversified property fund holding a portfolio of direct property investments. Cromwell Property Group (Cromwell) owns approximately 17.6% of the units in CPF. Cromwell Property Securities Limited (CPSL), a wholly owned subsidiary of Cromwell, is the responsible entity for the Fund (CPF RE). On 8 August 2012, Cromwell announced it is in negotiations for the potential acquisition of all the units in CPF that it does not already own. Following this, Cromwell negotiated a formal proposal under which it would acquire all of the outstanding CPF units, which Cromwell does not currently own (the Proposed Transaction). A holder of CPF units (CPF Unitholders) will be issued Cromwell stapled securities consisting of one Cromwell Corporation Limited (CCL) share and one Cromwell Diversified Property Trust (CDPT) unit (together, Cromwell Securities), with a full entitlement to the Cromwell September 2012 quarter distribution, as full and final consideration for their units. The consideration is to be based on a ratio of 0.2298 Cromwell Securities for 1 CPF unit, which has been determined based on the relative net tangible assets (NTA) per security of Cromwell and CPF on 30 June 2012 according to their respective audited accounts, adjusted for expected transaction costs of both parties, being 67.27 cents and 15.46 cents, respectively. The Proposed Transaction is to be effected by a trust scheme to be facilitated by way of amendments to the CPF constitution, with those amendments being the subject of a special resolution by CPF Unitholders in a general meeting. Purpose of the report Whilst an independent expert’s report in respect of the Proposed Transaction is not required to meet any statutory obligations, the independent directors of CPF RE (the CPF Directors) have requested that Deloitte Corporate Finance Pty Limited (Deloitte Corporate Finance) provide an independent expert’s report advising whether, in our opinion, the Proposed Transaction is fair and reasonable, and therefore in the best interests of CPF Unitholders. We understand that this independent expert’s report is to be provided to CPF Unitholders in order to assist in their assessment of the Proposed Transaction and will be included in the explanatory memorandum (Explanatory Memorandum) being provided to CPF Unitholders. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the CPF Unitholders and CPF, in respect of this report, including any errors or omissions however caused.
Member of Deloitte Touche Tohmatsu Limited
86 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
Basis of evaluation In evaluating the Proposed Transaction we have considered ASIC Regulatory Guide 111: Content of expert reports, issued by ASIC in March 2011 (ASIC Regulatory Guide 111). In order to assess whether the Proposed Transaction is fair and reasonable we have: assessed whether the Proposed Transaction is fair by estimating the fair market value of a CPF unit on a control basis and comparing that value to the estimated fair market value of the consideration to be received by CPF Unitholders pursuant to the Proposed Transaction assessed the reasonableness of the Proposed Transaction by considering other advantages and disadvantages of the Proposed Transaction to CPF Unitholders. ASIC Regulatory Guide 111 refers to a ‘control transaction’ as being the acquisition (or increase) of a controlling stake in an entity that could be achieved, for example, by way of a takeover offer, scheme of arrangement, approval of an issue of shares using item 7 of section 611 of the Corporations Act 2001 (Cth), a selective capital reduction or selective buy back under Chapter 2J. In respect of control transactions, under ASIC Regulatory Guide 111 an offer is: fair, when the value of the consideration is equal to or greater than the value of the securities subject to the offer. The comparison must be made assuming 100% ownership of the target entity (i.e. including a control premium) reasonable, if it is fair, or, despite not being fair, after considering other significant factors, securityholders should accept the offer, in the absence of any higher bids before the close of the offer. To assess whether the Proposed Transaction is fair and reasonable to CPF Unitholders, we have adopted the tests of whether the Proposed Transaction is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in ASIC Regulatory Guide 111. According to ASIC Regulatory Guide 111, if an expert were to conclude that a proposal was ‘fair and reasonable’, it will also be able to conclude that the proposal is in the best interests of the members of the entity. If an expert were to conclude that the proposal was ‘not fair but reasonable’, it is open to the expert to conclude whether the proposal is in the best interests of the members of the entity. If the expert concludes that the proposal is neither fair nor reasonable then the expert would conclude that the proposal is not in the best interests of members of the entity. Summary and conclusion In our opinion the Proposed Transaction is fair and reasonable and therefore in the best interests of CPF Unitholders. In arriving at this opinion, we have had regard to the following factors: The Proposed Transaction is fair According to ASIC Regulatory Guide 111, in order to assess whether the Proposed Transaction is fair, the independent expert is required to compare the fair market value of a unit in CPF on a control basis with the fair market value of the consideration under the Proposed Transaction. The Proposed Transaction is fair if the value of the consideration is equal to or greater than the value of the securities subject to the offer. Set out in the table below is a comparison of our assessment of the fair market value of a CPF unit with the consideration offered by Cromwell under the Proposed Transaction.
Table 1: Evaluation of fairness
Low High Cents per security Cents per security
Estimated fair market value of a CPF unit on a control basis (Section 7.2.2) 14.21 16.19 Estimated fair market value of consideration offered (Section 8.2) 16.55 17.24
Source: Deloitte Corporate Finance analysis Note: 1. All amounts in this report are expressed in Australian dollars ($) unless otherwise stated and may be subject to rounding The fair market value of the consideration offered by Cromwell is above our estimate of the fair market value of a CPF unit. Accordingly it is our opinion that the Proposed Transaction is fair.
Deloitte: Cromwell Property Fund – Independent expert’s report and Financial Services Guide Page 2
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 87
Valuation of a CPF unit CPF currently faces a number of challenges including a high level of gearing (which is required to be reduced by 30 June 2013) and suspension of distributions and unit redemptions. Therefore, CPF is required to implement strategies to improve its financial position. According to ASIC Regulatory Guide 111 (paragraph 15), the fair market value of the target securities should be determined on the basis of a knowledgeable and willing, but not anxious, seller that is able to consider alternative options to the proposed transaction (for example an orderly realisation of the target’s assets). Having regard to ASIC Regulatory Guide 111, we have used the net assets on a going concern basis methodology to estimate the fair market value of a unit in CPF on a control basis which estimates the fair market value of CPF by aggregating the fair market value of its assets and liabilities. The most significant factor impacting our estimate of the fair market value of a CPF unit is the underlying values of the properties held by CPF (the Properties). Due to the sensitivity of our valuation of a CPF unit to the valuation of the Properties, we have also considered market evidence derived from our analysis of asset-based multiples (tangible assets/earnings before interest and tax (EBIT)) observed in listed securities involving entities comparable to CPF to provide additional evidence of the fair market value of a unit in CPF. Due to the financial difficulties faced by CPF and other entities operating within the A-REIT sector, and having regard to our interpretation of ASIC Regulatory Guide 111, we do not consider more traditional cross-check methodologies such as implied earnings multiples based on enterprise value/EBIT, distribution yields or price/adjusted funds from operations provide meaningful benchmarks to cross-check our valuation of CPF. Our assessment of the fair market value of CPF’s net assets is based on the audited balance sheet as at 30 June 2012, adjusted to reflect the current fair market values of CPF’s assets and liabilities. The fair market value of the Properties is based on detailed valuations for each of CPF’s five properties which were prepared as at 30 June 2012. Of these, three were prepared by independent appraisers and the remaining two were management valuations adopted by the CPF Directors. All of the Properties have been independently valued between December 2011 and June 2012. The property valuations as at 30 June 2012 reflect a weighted average valuation capitalisation rate1 (WACR) of 9.72% (including the Edinburgh Park property) and 9.88% (excluding the Edinburgh Park property). This is an increase in the capitalisation rate of approximately 0.50% compared to the valuations as at 30 June 2011. We have reviewed the valuations of the Properties prepared as at 30 June 2012 and nothing has come to our attention that would cause us to make any adjustments for any valuation movements since 30 June 2012. Whether these valuations fall or rise in the future will be a major driver of the fair market value of a CPF unit. Given the high level of debt within the Fund, our valuation is sensitive to relatively small movements in the underlying value of the Properties. Our estimate of the impact of movements in the underlying valuations of the Properties on the fair market value of a CPF unit is set out below.
Figure 1: Valuation of a unit in CPF – sensitivity to movements in underlying real property values
50.00
Change in value of a CPF unit given a 40.00 50 basis point change in capitalisation rate on the valuation of the Properties 41.42
33.65
30.00
26.78 Assessed fair market value (mid-point)
20.00 20.67
15.20
10.27 Estimated fair marketvalue (cents per unit) 10.00
5.81
1.74 - (17%) (1.97) (14%) (9%) (5%) 0% 6% 12% 19% 26%
(10.00)
Percentage change in the value of the Properties as at 30 June 2012
Source: Deloitte Corporate Finance analysis
1 A capitalisation rate is the rate of return on a real estate investment property based on the expected income that the property will generate. Capitalisation rates are commonly calculated by dividing a property’s net income (fully leased) by the value of the property or transaction sale price achieved
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Broadly speaking, a +/- 0.5% movement in the underlying capitalisation rate of the Properties (assuming no movement in the value of the Edinburgh Park industrial land held by CPF which has not been valued utilising a capitalisation approach) would have a (5.0%)/+5.5% impact on the value of the Properties which equates to an impact of approximately (32%)/+36% on the value of a CPF unit, after taking into account the impact of the existing leverage of the Fund. We note that a 0.5% downward movement in the underlying capitalisation rate of the Properties (with no corresponding change in the value of Cromwell Securities) would result in our assessment of the Proposed Transaction being not fair to CPF Unitholders. Valuation of consideration In order to estimate the fair market value of the consideration to be received by CPF Unitholders, we have relied upon an analysis of recent trading prices for Cromwell Securities (refer to Section 0). We have valued the consideration offered to CPF Unitholders under the Proposed Transaction at between 16.55 and 17.24 cents per CPF unit, which is set out in the table below.
Table 2: Valuation of consideration offered per CPF unit
Value of consideration Low High Cents per security Cents per security
Value of a Cromwell Security 72.00 75.00
Consideration ratio 0.2298 0.2298
Consideration per CPF unit 16.55 17.24
Source: Deloitte Corporate Finance analysis We consider that the value of a Cromwell Security includes the value attributable to the quarterly distribution to be paid by Cromwell in September 2012. Regardless of the outcome of the Proposed Transaction, the price of a Cromwell Security will vary in the future, based on market movements including securityholders’ perception of industry trends, changes in the value of the underlying assets of Cromwell and changes in Cromwell’s specific circumstances. If the implementation date of the Proposed Transaction is after the record date for the Cromwell September 2012 quarter distribution, CPF Unitholders will be entitled to, and be paid, the Cromwell September 2012 quarter distribution, in addition to the Cromwell Securities received in exchange for their CPF units. The valuation of a Cromwell Security has been assessed on a minority interest basis because, if the Proposed Transaction is approved, CPF Unitholders will hold a portfolio interest and therefore will become minority securityholders in the Cromwell. The Proposed Transaction is reasonable In accordance with ASIC Regulatory Guide 111 an offer is reasonable if it is fair. On this basis, in our opinion the Proposed Transaction is reasonable. We have also considered the following factors in assessing the reasonableness of the Proposed Transaction: Advantages of the Proposed Transaction The likely advantages to CPF Unitholders if the Proposed Transaction is approved include:
No superior alternatives to the Proposed Transaction If the Proposed Transaction does not proceed, CPF will continue to face a number of challenges including: there is minimal head room between the Fund’s current bank loan (Bank Loan) to value ratio (LVR) of approximately 67% and its bank covenant limit of 70%. In June 2012, the CPF RE negotiated a temporary increase in the LVR limit under the Bank Loan from 65% to 70% for the period 30 June 2012 to 30 June 2013. The negotiations did not result in any other material or unusual obligations being imposed on CPF. If the LVR is not reduced to 65% or lower by 30 June 2013, the Fund will be in breach of its Bank Loan subject to any further negotiations between the CPF RE and its lender. Therefore, it is likely that the Fund will be required to take action
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to reduce its LVR to 65% or lower by 30 June 2013 and this would likely require the sale of one or more properties or additional equity injections from existing or new investors distributions are currently suspended and are not likely to recommence until the Fund’s LVR is reduced to an acceptable level and the majority of the current vacancy at the Smithfield property is leased redemptions have been suspended since January 2009, and are unlikely to recommence without significant asset sales being undertaken, or a recapitalisation of the Fund being completed. CPF will continue to seek to address these challenges if the Proposed Transaction does not proceed, however CPF has previously considered the following strategic alternatives to the Fund (refer to section 4.2 of the Explanatory Memorandum) and none of them are considered to provide a superior outcome for CPF Unitholders: immediate asset sales; given the current market environment it is likely to take some time to sell the Properties and there is uncertainty as to the price which could be achieved for these sales, in particular, CPF may be viewed as a forced seller which could adversely impact the net proceeds received. Both the Hurstville property and the Smithfield property were taken to market in early 2012, with neither property attracting a formal offer. Furthermore, the sale of the Properties would incur additional transaction costs (in comparison to the estimated costs payable by CPF in relation to the Proposed Transaction of $397,000) associated with agents’ fees, marketing and legal costs. CPF estimates these costs to be equivalent to 1.5% of the current value of the Properties, or approximately $2.5 million, which would reduce the net proceeds available to CPF Unitholders by approximately 1.5 cents per CPF unit if all the Properties were sold at prices equivalent to their current valuations. In the event that a number of the Properties were sold, this may not result in liquidity for CPF Unitholders as gearing levels would need to be reduced significantly prior to any redemption offer being made. In order to reduce gearing (total debt to total assets) to 55%, approximately $90 million of assets sales would need to occur, which represents approximately 55% of the value of the Properties as at 30 June 2012 managed wind-up; which may involve a lengthy process dependent upon the timing of the sale of the Properties, before receiving the net proceeds from a wind-up, and the quantum of proceeds to be realised is not certain as there is no guarantee that the Properties could be sold at or above current valuations. If the Properties were sold at less than current valuations to expedite a sale, this would result in a reduction in the NTA value of the Fund recapitalisation through a capital raising; in order to generate sufficient support, a significant discount to NTA is likely to be required thus diluting existing CPF Unitholders that do not participate. To reduce gearing (total debt to total assets) to 55%, an equity injection in the region of $40 million would be required. This represents approximately 155% of CPF’s net assets as at 30 June 2012. For a potential capital raising to provide liquidity to the Fund in addition to reducing gearing, an even greater amount would be required to be raised standalone listing; given the current financial position of the Fund including its high gearing levels and suspension of distributions, portfolio size, composition and quality, it is likely that CPF would trade at a substantial discount to its NTA. Currently non-stapled Australian Real Estate Investment Trusts (A-REITs) listed on the Australian Securities Exchange (ASX), on average, trade at a discount to NTA of 30%2 with smaller and highly geared A-REITs trading at greater discounts. Based on the foregoing, the strategic alternatives set out above will result in significant dilution in the NTA value per unit of the Fund and/or have long lead times and significant execution risks, and therefore do not provide a superior alternative to the Proposed Transaction. The Proposed Transaction provides improved liquidity for CPF Unitholders The consideration offered pursuant to the Proposed Transaction comprises Cromwell Securities, which are listed on the ASX thereby providing access to liquidity. CPF has not issued or redeemed units since January 2009, and therefore CPF Unitholders have been unable to realise their investment in CPF. Whilst unit transfers may occur between CPF Unitholders, these are negotiated and arranged independently of CPF. Under the current structure, and in the absence of further asset sales discussed below, CPF would need to undertake a large scale capital raising to provide liquidity for those CPF Unitholders wanting to realise their investment. CPF exceeded its LVR covenant in June 2012, however was able to renegotiate a temporary increase for a 12 month period, leaving equity issuance as the most viable option for raising cash. A large scale equity issuance would have the effect of diluting holdings of existing CPF Unitholders that do not participate.
2 Capital IQ as at 24 August 2012
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The Proposed Transaction enables CPF Unitholders to realise NTA for their CPF units The merger ratio has been determined with reference to the relative NTA of Cromwell and CPF. The mid-point of the consideration offered implies a premium to CPF’s 30 June 2012 NTA of approximately 9% at a time when similar A-REITs are transacting at significant discounts to NTA. Given the current market conditions and trends in the A-REIT sector, investors in A-REITs (particularly highly leveraged vehicles) would generally not expect to receive consideration equivalent to NTA. Mergers and acquisitions occurring in the A-REIT sector since August 2009 have been at an average discount of 24%3 to NTA and listed securities for non-stapled A-REITs are currently trading at an average discount to NTA of 30%2.
Enhanced growth prospects relative to CPF on a standalone basis Cromwell’s growth prospects (and potentially future appreciation in the value of a Cromwell Security) are expected to be underpinned by its relatively strong current financial position and leveraged exposure to the property cycle through an integrated property investment model as well as funds and property management businesses. If the Proposed Transaction is approved, CPF Unitholders may have improved income and capital growth prospects through holding Cromwell Securities compared to holding units in CPF on a standalone basis.
Other advantages Other advantages of the Proposed Transaction to CPF Unitholders include: if the Proposed Transaction is approved, CPF Unitholders will own securities in an entity which is significantly larger, more diversified and has a higher grade portfolio than CPF on a standalone basis. In particular:
- Cromwell is approximately 30 times larger than CPF on a standalone basis based on the total NTA of CPF and Cromwell as at 30 June 2012 of $26.8 million and $789.0 million, respectively
- CPF Unitholders will hold an interest in a larger, more diversified property group that includes a number of high grade commercial, retail and industrial properties across Australia, and funds management and property management businesses, all of which will enhance geographic and property sector diversification. Cromwell’s investment portfolio consists of 22 properties compared to 5 properties held by CPF
- larger property groups have a number of benefits over their smaller counterparts including a wider spread of vacancy risk and tenant default risk amongst a greater tenant base, and greater efficiency of corporate and other overhead costs which are spread across a larger property base
- Cromwell has a longer weighted average lease expiry (WALE) of 6.0 years compared to 3.7 years for the Properties held by CPF CPF Unitholders will receive Cromwell Securities as consideration under the Proposed Transaction. Cromwell has historically paid regular quarterly distributions to securityholders whereas, the distributions of CPF have been suspended again as of July 2012 as an externally managed property trust, CPF currently pays fund management fees to CPF RE (although in recent times CPF RE has charged a reduced management fee). If the Proposed Transaction proceeds, CPF Unitholders will hold an interest in Cromwell which will include both CPF and CPF RE. Accordingly, the payment of fund management fees to third parties will be eliminated, and these fees will be internalised at no cost. Disadvantages of the Proposed Transaction The likely disadvantages to CPF Unitholders if the Proposed Transaction is approved include: Significant decrease in earnings per security Subsequent to the implementation of the Proposed Transaction, Cromwell is estimated to have forecast financial year ended 30 June (FY) 2013 operating earnings per unit of 7.6 cents per Cromwell Security, which will equate to 1.74 cents per CPF unit based on the merger ratio of the Proposed Transaction. In comparison, CPF on a standalone basis is estimated to have forecast FY2013 operating earnings per unit of 2.8 cents per unit. If the Proposed Transaction proceeds, CPF Unitholders will experience a 37.9% reduction in earnings per unit.
3 Based on an analysis of transactions involving A-REITs between August 2009 and June 2012 as sourced from Connect 4 and Capital IQ
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However, we note that in July 2012, following the failure of the primary tenant at the Smithfield property, CPF announced that distributions would be suspended and no distributions are expected to be paid in respect of FY2013. The Fund is not expected to be in a position to recommence distributions until its LVR for its Bank Loan facility is reduced and the majority of the remaining vacancy is leased and the cost of re-leasing paid (i.e. lease incentives). CPF has indicated that there is no certainty when, or if, CPF Unitholders will re-commence receiving distributions, or the amount which will be able to be distributed. Change in the risk profile of the investment As a result of the Proposed Transaction, there will be a change in the risk profile of the underlying investment held by CPF Unitholders. Cromwell’s current business model is more diverse than that of CPF, which holds direct property investments, and includes income generation from funds and property management in addition to its more diverse property portfolio. We note that the funds and property management activities of Cromwell generated approximately 10% of revenue in FY2012, and it is Cromwell’s intention that funds and property management activities will not contribute more than 20% of its operations going forward. It is possible that the composition of this broadened investment portfolio may not suit individual investors’ preferences, in particular, investors who sought to gain exposure to direct property investment only. Security pricing will be more volatile Under the Proposed Transaction, the consideration to be received will be listed Cromwell Securities being one CCL share stapled with one CDPT unit, the price of which will be set by market forces. Due to the dynamic nature of the listed security market, and generally the increased volatility in equity markets of late, volatility in the price of the Cromwell Securities is likely to be higher than the unlisted unit pricing reset methodology currently used by CPF (however, as no issuances and redemptions are currently available to CPF Unitholders this is a notional pricing mechanism only). This increased volatility may not appeal to all investors. Change in the nature and frequency of the distributions Distributions have historically been paid to CPF Unitholders monthly, although distributions for the Fund have recently been suspended. If the Proposed Transaction proceeds, Cromwell will continue to pay securityholders quarterly distributions. Depending upon individual investors’ preferences, this may be considered a disadvantage for those preferring the prospect of more regular payments. Foreign CPF Unitholders will be unable to participate in the Proposed Transaction Foreign CPF Unitholders (excluding those residents in New Zealand) are not entitled to receive Cromwell Securities as consideration for their CPF units under the Proposed Transaction, and there will be a sale facility established for those investors ineligible to participate in the Proposed Transaction. Refer to section 2 of the Explanatory Memorandum for further information. Consequently, foreign CPF Unitholders will be unable to participate in the future growth associated with the CPF investment portfolio or in Cromwell, unless they subsequently purchase Cromwell Securities on market. CPF Unitholders will have a diluted interest in the Properties Whilst there is no certainty that the value of the Properties will appreciate, general market sentiment indicates that the current stage in the economic cycle is unlikely to be an optimum time to realise full value for real estate investments. Due to the high financial leverage of the Fund, any appreciation in the Properties over time would be likely to translate to a significant improvement in the NTA value of CPF. If the Proposed Transaction proceeds, the exposure of CPF Unitholders to any medium term upside in the values of the Properties will be diluted through the participation of Cromwell security holders. However, this will be mitigated by the fact that CPF Unitholders will also participate in the future growth prospects of Cromwell which is exposed to similar industry cycles. Other matters Tax implications The tax consequences of the Proposed Transaction may vary depending on the particular circumstances of an individual CPF Unitholder. However we note the proportion of tax deferred income distributable from Cromwell will be lower in the future in comparison to the distributions that may become available from CPF on a standalone basis (if it were to re- commence distributions). Individual investors should consult their tax advisors in relation to their particular circumstances. Further details in respect of the potential taxation implications are provided in Annexure 2 of the Explanatory Memorandum.
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No alternative offers for the Fund have been received As at the date of our independent expert’s report, CPF has not received any alternative offers for its units. Conclusion on reasonableness On balance, in our opinion, the advantages of the Proposed Transaction outweigh the disadvantages. Opinion In our opinion, the Proposed Transaction is fair and reasonable to CPF Unitholders. It is therefore in the best interests of CPF Unitholders. An individual CPF Unitholder’s decision in relation to the Proposed Transaction may be influenced by his or her particular circumstances. If in doubt investors should consult an independent adviser, who should have regard to their individual circumstances. This opinion should be read in conjunction with our detailed report which sets out our scope and findings.
Yours faithfully DELOITTE CORPORATE FINANCE PTY LIMITED
Robin Polson Rachel Foley-Lewis Director Director
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Contents
1 Overview of the Proposed Transaction ...... 11 1.1 Summary ...... 11 1.2 Cromwell’s intentions ...... 11 1.3 Key conditions of the Proposed Transaction ...... 11
2 Scope of the report ...... 12 2.1 Purpose of the report ...... 12 2.2 Basis of evaluation ...... 12 2.3 Limitations and reliance on information ...... 13
3 The Australian property industry ...... 14 3.1 Australian Real Estate Investment Trusts ...... 14 3.2 Australian commercial property market ...... 17 3.3 Australian retail property market ...... 19 3.4 Australian industrial property market ...... 21
4 Profile of Cromwell Property Fund ...... 24 4.1 Overview ...... 24 4.2 History ...... 24 4.3 The Properties ...... 24 4.4 Group structure ...... 25 4.5 Responsible entity ...... 26 4.6 Unitholder profile ...... 26 4.7 Financial performance ...... 28 4.8 Financial position...... 30 4.9 Debt structure ...... 31
5 Profile of Cromwell Property Group...... 32 5.1 Overview ...... 32 5.2 History ...... 32 5.3 Property assets ...... 32 5.4 Funds management ...... 36 5.5 Group structure ...... 36 5.6 Responsible entity ...... 37 5.7 Capital structure and unit holders ...... 37 5.8 Security price performance ...... 40 5.9 Financial performance ...... 42
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5.10 Financial position...... 44 5.11 Debt structure ...... 45
6 Valuation methodology...... 47 6.1 Valuation methodologies ...... 47 6.2 Selection of valuation methodologies ...... 48
7 Valuation of CPF ...... 50 7.1 Summary ...... 50 7.2 Net assets on a going concern basis ...... 50 7.3 Asset based multiples ...... 55
8 Valuation of Cromwell ...... 57 8.1 Introduction ...... 57 8.2 Analysis of recent security trading in Cromwell ...... 57 8.3 Valuation cross check ...... 60
Appendix A: Glossary ...... 63
Appendix B: Comparable entities to CPF ...... 65
Appendix C: Comparable entities to Cromwell ...... 66
Appendix D: Sources of information ...... 68
Appendix E: Qualifications, declarations and consents ...... 69
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 95 1 Overview of the Proposed Transaction 1.1 Summary On 8 August 2012, Cromwell announced it was in negotiations for the potential acquisition of all the units in CPF that it does not already own. Following this, Cromwell negotiated the Proposed Transaction pursuant to which it would acquire all of the outstanding CPF units which Cromwell does not currently own. Cromwell currently holds 17.6% of the units in CPF. CPF Unitholders will be issued Cromwell Securities, consisting of one CCL share and one CDPT unit, with a full entitlement to the Cromwell September 2012 quarter distribution, as full and final consideration for CPF units. The consideration is to be based on a ratio of 0.2298 Cromwell Securities for 1 CPF unit, which is based on the relative NTA per security of Cromwell and CPF unit on 30 June 2012 according to their respective audited accounts, adjusted for expected transaction costs, being 67.27 cents and 15.46 cents, respectively. Based on the consideration ratio, it is anticipated approximately 32.4 million Cromwell Securities will be issued to CPF Unitholders, representing approximately 2.7% of Cromwell Securities subsequent to the Proposed Transaction. When the Proposed Transaction consideration is calculated, the number of Cromwell Securities to be received by CPF Unitholders may include a fraction of a Cromwell Security. Fractions will be rounded down to the nearest whole Cromwell Security. The Proposed Transaction is to be effected by a trust scheme to be facilitated by way of amendments to the CPF constitution, with such amendments being the subject of a special resolution by CPF Unitholders in a general meeting. There will be a sale facility available to foreign investors in the Fund who are ineligible to participate in the Proposed Transaction. Full details of the Proposed Transaction are listed in the Explanatory Memorandum to which this independent expert’s report is attached. 1.2 Cromwell’s intentions Cromwell is an integrated real estate group listed on the ASX with $1.7 billion in investment property assets. An overview of Cromwell is presented in Section 5 of this report. If the Proposed Transaction is successful Cromwell will own 100% of the Fund and CPF Unitholders will hold approximately 2.7% of the Cromwell Securities. Cromwell intends to continue to hold the Properties in CPF following completion of the Proposed Transaction. In particular, Cromwell intends to undertake the necessary capital expenditure to preserve or improve the value of the Properties and apply appropriate strategies such as lease incentives and refurbishments to reduce existing vacancies and where possible increase the WALE. 1.3 Key conditions of the Proposed Transaction The Proposed Transaction is subject to various conditions, the most significant being: CPF Unitholders approving the Proposed Transaction the CPF Directors continuing to unanimously recommend the Proposed Transaction CPF not receiving a superior proposal no material adverse changes or prescribed occurrences. Further details of the key conditions of the Proposed Transaction are included in section 2 of the Explanatory Memorandum.
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96 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 2 Scope of the report 2.1 Purpose of the report Whilst an independent expert’s report in respect of the Proposed Transaction is not required to meet any statutory obligations, the CPF Directors have requested that Deloitte Corporate Finance provide an independent expert’s report advising whether, in our opinion, the Proposed Transaction is fair and reasonable, and therefore in the best interests of CPF Unitholders. We understand that this independent expert’s report is to be provided to CPF Unitholders in order to assist in their assessment of the Proposed Transaction and will be included in the Explanatory Memorandum being provided to CPF Unitholders. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the CPF Unitholders and CPF, in respect of this report, including any errors or omissions however caused. 2.2 Basis of evaluation In our assessment as to whether the Proposed Transaction is in the best interests of CPF Unitholders, we have had regard to common market practice and to ASIC Regulatory Guide 111, which prescribes standards of best practice in the preparation of independent expert’s reports for control transactions.
2.2.1 ASIC Regulatory Guide 111 This regulatory guide provides guidance in relation to the content of independent expert’s reports prepared for a range of transactions. ASIC Regulatory Guide 111 refers to a ‘control transaction’ as being the acquisition (or increase) of a controlling stake in an entity that could be achieved, for example, by way of a takeover offer, scheme of arrangement, approval of an issue of shares using item 7 of section 611 of the Corporations Act 2001 (Cth), a selective capital reduction or selective buy back under Chapter 2J. In respect of control transactions, under ASIC Regulatory Guide 111 an offer is: fair, when the value of the consideration is equal to or greater than the value of the securities subject to the offer. The comparison must be made assuming 100% ownership of the target entity (i.e. including a control premium) reasonable, if it is fair, or, despite not being fair, after considering other significant factors, securityholders should accept the offer, in the absence of any higher bids before the close of the offer. To assess whether the Proposed Transaction is fair and reasonable to CPF Unitholders, we have adopted the tests of whether the Proposed Transaction is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in ASIC Regulatory Guide 111.
2.2.2 Fairness ASIC Regulatory Guide 111 defines an offer as being fair if the value of the offer price is equal to or greater than the value of the securities the subject of the offer. The comparison must be made assuming 100% ownership of the target entity. Accordingly we have assessed whether the Proposed Transaction is fair by comparing the value of the consideration offered under the Proposed Transaction with the value of a CPF unit. The CPF units have been valued at fair market value, which we have defined as the amount at which the units would be expected to change hands between a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of a CPF unit has not been premised on the existence of a special purchaser. We have assessed the value of each CPF unit by estimating the current value of CPF on a control basis and dividing this value by the number of units on issue.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 97 2.2.3 Reasonableness ASIC Regulatory Guide 111 considers an offer in respect of a control transaction, to be reasonable if either: the offer is fair despite not being fair, but considering other significant factors, securityholders should accept the offer in the absence of any higher bid before the close of the offer. To assess the reasonableness of the Proposed Transaction we considered the following significant factors in addition to determining whether the Proposed Transaction is fair: the existing unitholding of Cromwell in the Fund the likely liquidity of CPF units in the absence of the Proposed Transaction benefits available to Cromwell upon achieving 100% ownership of CPF, and any special value of CPF to Cromwell the value to an alternative bidder and the likelihood of an alternative offer being made other implications associated with CPF Unitholders not approving the Proposed Transaction.
2.2.4 Best interests To assess whether the Proposed Transaction is in the best interests of CPF Unitholders, we have adopted the test of whether the Proposed Transaction is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable, as set out in ASIC Regulatory Guide 111. ASIC Regulatory Guide 111 provides guidance in relation to the content of independent expert’s reports prepared for transactions under Chapters 5, 6 and 6A of the Corporations Act 2001 (Cth), in relation to takeover bids, schemes of arrangement and other transactions. According to ASIC Regulatory Guide 111, if an expert were to conclude that a proposal was ‘fair and reasonable’, it will also be able to conclude that the proposal is in the best interests of the members of the entity. If an expert were to conclude that the proposal was ‘not fair but reasonable’, it is open to the expert to conclude whether the proposal is in the best interests of the members of the entity, however, the expert should clearly state that the consideration is not equal to or greater than the value of the securities subject to the proposal. If the expert concludes that the proposal is neither fair nor reasonable then the expert would conclude that the proposal is not in the best interests of members of the entity.
2.2.5 Individual circumstances We have evaluated the Proposed Transaction for CPF Unitholders as a whole and have not considered the effect of the Proposed Transaction on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposed Transaction from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Proposed Transaction is fair and reasonable and therefore in the best interests of CPF Unitholders. If in doubt investors should consult an independent adviser, who should have regard to their individual circumstances. 2.3 Limitations and reliance on information The opinion of Deloitte Corporate Finance is based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time. This report should be read in conjunction with the declarations outlined in Appendix E. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited (APESB). Our procedures and enquiries did not include verification work nor constitute an audit or a review engagement in accordance with standards issued by the Auditing and Assurance Standards Board (AUASB) or equivalent body and therefore the information used in undertaking our work may not be entirely reliable.
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98 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 3 The Australian property industry
CPF and Cromwell are classified as A-REITs. CPF and Cromwell each hold direct investments in Australian property assets with exposure to commercial, retail and industrial sectors. A-REITs and each property sector are discussed below in Section 3.1 to 3.4. 3.1 Australian Real Estate Investment Trusts
3.1.1 Overview An A-REIT is an investment vehicle which enables investors to acquire an interest in a professionally managed portfolio of real estate assets in Australia. A-REITs provide investors exposure to the value of the real estate held by the trust and the rental income generated from those assets and generally offer increased liquidity over direct property investment. A-REITs are generally structured in one of two ways: a stand-alone trust or entity providing direct exposure to underlying real estate assets a stapled security combining funds management, property development and/or other corporate activities together with the passive investment in a real estate portfolio4. The trend in recent years has been towards stapled structures with internalised management. Returns from A-REITs are generated from income and capital growth. Regular income, or yields, typically in the range of 6% to 10% per annum from rentals is a common feature of A-REITs, with distributions typically being made quarterly or semi-annually. In addition to distributions, A-REITs also offer the opportunity for capital growth as a result of increases in the market values of the underlying property investments over time. A-REITs invest across a range of properties in a variety of geographical regions, with varying lease lengths and tenant types. Investors generally evaluate A-REITs by assessing the security of the income stream which is typically derived from rental income on the underlying assets, the quality of the individual properties and tenants, the length of tenant leases, the level of gearing, rental yields and the quality of management. The relative risk of these elements will generally be reflected in the implied market yield (return on investment) of individual A-REITs. A-REITs may also be able to access tax concessions such as capital allowances and some of the tax associated with rental income earned may be deferred. The tax deferred component generally ranges from 15% to 100% and is passed on to investors through tax-deferred distributions. A-REITs are commonly categorised according to the property type, or property mix, held by the entity. These categories include: industrial – warehouse and distribution centres, manufacturing buildings and factories, and industrial parks commercial (office) – medium to large scale office buildings, typically located in Central Business Districts (CBDs) and suburban districts of major cities hotel/leisure – properties including hotels, pubs, cinemas and theme parks retail – properties including shopping centres and bulky goods retailers diversified – a mix of two or more of industrial, office, hotel/leisure and retail properties. A-REIT securities may be listed or unlisted. Australia has the most securitised property market in the world with almost half of Australia’s institutional grade real estate held by listed public entities. However, the proportion varies by sub-sector with retail assets having the highest degree of institutional ownership, followed by office and industrial. The Standard and Poor’s (S&P)/ASX 200 A-REIT index (A-REIT Index), the primary industry indicator, includes 16 A-REITs which trade on the ASX. As at 24 August 2012, the market capitalisation of the A-REIT Index was approximately $78 billion, which represents approximately 6.3% of the market capitalisation of the S&P/ASX 200 Index at the same date. The performance of A-REITs can provide insights into the outlook for the real estate sector as a whole.
4 ASX, A-REIT Fact Sheet, 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 99 The A-REIT sector has historically been perceived as a low risk investment offering steady income and therefore attractive investments for risk averse, yield-focused investors seeking a liquid exposure to property. The global financial crisis, which has resulted in a deterioration of world economies and greatly reduced the availability of debt, has had an adverse impact on the A-REIT sector globally. The underperformance of the A-REIT sector through this period has impacted the sector’s reputation as a low-risk asset class.
3.1.2 Recent trends in the A-REIT sector The A-REIT market emerged during the 1990s following a collapse in the commercial property market which highlighted certain limitations of direct investment at the time including insufficient liquidity and lack of regular independent property valuations. This resulted in a wave of A-REIT listings during the 1990s, offering investors liquidity, market-based unit pricing and more regular valuations. In the late 1990s to early 2000s, transaction activity accelerated with significant consolidation occurring within the sector. Over the period from 2000 to 2007 the A-REIT sector performed strongly with the A-REIT Index experiencing a compound annual growth rate (CAGR) of approximately 10%, slightly outperforming the broader equities market with a lower level of volatility during the period. As a result of the global financial crisis, however, the sector experienced a significant decline from early 2007 performing well below the S&P/ASX 200 index as shown in the figure below.
Figure 2: Performance of S&P/ASX 200 Property Index against S&P/ASX All Ordinaries Index 140
120
100
80 Value
Index
60 Relative
40
20
0
S&P ASX All Ordinaries Index S&P/ASX 200 A‐REIT Source: Reuters, Deloitte Corporate Finance analysis In 2007 the A-REIT market experienced a record year of capital raisings with approximately $13 billion of equity capital raisings as A-REITs pursued growth strategies. However, the global financial crisis resulted in a number of adverse consequences for equity markets, with A-REITs being particularly exposed due to the relatively high levels of gearing employed and the cyclical nature of the underlying asset values which resulted in market capitalisations falling by approximately 60% in the 12 month period to December 2008 (compared with 40% for the general market over the same period). In general, the global financial crisis had the following consequences for A-REITs: declining asset values: the lack of liquidity in debt and equity markets combined with adverse economic prospects in the short term contributed to a widespread fall in asset prices in the Australian real estate sectors. The substantial decline in asset values put pressure on debt covenants and resulted in financiers threatening to force real estate vehicles into either aggressive asset sales or significant equity raisings to repay debt emergency recapitalisations: a large number of equity capital raisings were undertaken during the global financial crisis. A-REITs raised equity capital primarily to satisfy short-term debt commitments, reduce balance sheet gearing to prevent debt covenant breaches and meet capital expenditure and/or working capital obligations. Since January 2008, A-REITs have raised approximately $19 billion in equity often at substantial discounts to NTA or
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100 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting volume weighted average price (VWAP) prior to the announcement of the capital raising lower debt capacity and higher funding costs: the debt market has changed considerably since late 2007 with increasing interest rate margins, more stringent covenants and reduced liquidity available as financiers, particularly in the real estate sector, have repriced risk and have been more selective in their lending criteria. In some instances the higher rate at which debt can be refinanced has led to some assets and projects becoming unviable lower distributions: following the onset of the global financial crisis, A-REITs restricted distributions in order to repay debt and improve gearing levels. In addition, many A-REITS changed their distribution policies from paying out all operating income to a target payout ratio based on a proportion of adjusted funds from operations or other cash flow measures. These factors contributed to a decline in investor confidence and negative re-rating of the sector. As a consequence many A-REITS commenced trading at a discount to NTA with smaller A-REITS, and those with higher gearing levels, trading at greater discounts. More recently A-REITs have: reduced leverage and refinanced near term maturities: due to the large scale recapitalisations discussed above, average gearing for the A-REIT sector has substantially reduced with many A-REITs targeting gearing in the order of 30% whereas historically these same vehicles have been geared in excess of 50% experienced stabilising property fundamentals and capitalisation rates: as the Australian economy is stabilising, underlying rental demand and occupancy metrics have begun to stabilise, and investment demand for real estate, albeit at the prime end of the market, has increased recommenced or increased distributions: as property cash flows begin to improve, A-REITs have recommenced distributions to unitholders, generally still at lower payout ratios than has historically been the case focused on growth options: until recently there have been few transactions in the Australian real estate sectors due to the limited availability of both senior bank debt and mezzanine finance and significant divergence between vendor and buyer price expectations. However, there have been some positive signs emerging in respect of the appetite for pursuing growth options, through recommencement of large scale development activity as well as corporate activity in the sector. During the 2011 calendar year approximately $1 billion of asset sales were undertaken by listed A-REITs to reduce gearing levels and to undertake share buy-backs. Despite the positive trends outlined above, a number of A-REITs continue to trade at substantial discounts to NTA, with the average discount for non-stapled entities within the sector as at 24 August 2012 being approximately 30%5. A number of A-REITs with offshore assets attract higher discounts to NTA due to the relative uncertainty of asset prices offshore, particularly in the United States (US) and Europe. Whilst some A-REITs are trading at or above NTA, they are generally entities that earn active income from funds management, development and other activities (such as Westfield and Goodman Group) in addition to income from passive property investment. A-REITs continue to trade at discounts to NTA due to a number of factors including: the listed market remains cautious of NTA values despite a rising number of transactions occurring at or close to NTA and independent valuations supporting the NTA continuing negative market sentiment and uncertainty around the global economic outlook and the impact on property values limited near term growth prospects in respect of:
o distributions due to the above factors and lower payout ratios as a consequence of more prudent distribution policies amongst most A-REITs
o rental growth expectations across most geographic regions and property sub-markets whilst capitalisation rates are generally firming in Australia (in particular for prime grade properties), they are not expected to deliver significant capital growth in the near term.
5 Capital IQ as at 24 August 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 101 3.1.3 Current demand for prime and non-prime properties The major asset classes within the property market are graded according to the size, quality and potential usages of the property amongst other factors with prime grade representing the highest grade. Larger prime grade properties are regarded as having a more stable income stream than secondary properties and are characterised by blue chip tenants with long-term lease profiles. As a consequence, these properties have historically been keenly sought after by listed property trusts, institutional investors and high net worth investors, resulting in correspondingly lower valuation income yields. Cromwell’s property portfolio consists of higher prime grade properties compared to the Properties within the CPF portfolio. Key parameters considered by investors in determining prime and non-prime grade qualities include: security of income stream property and tenant quality tenant lease length management quality location rental yields gearing levels. Long lease terms and strong lease covenants are attractive to both institutional and private investors and therefore continue to drive demand for prime grade properties. Recently, the uncertainty in asset pricing combined with tight credit market conditions has limited supply of new prime grade properties to the market. As such, demand for prime properties is expected to remain strong. In comparison the market for non-prime property is considerably less liquid. Assets which require refurbishment, have low WALEs or high vacancy rates and weak lease covenants have been heavily discounted by investors. Current yields for non-prime suburban grade property are approximately 1.0% to 3.0% above prime grade property reflecting the limited upside in expected capital growth and difficulties in funding because of short term WALEs. 3.2 Australian commercial property market
3.2.1 Overview The Australian commercial property market consists of operators who develop and lease office property. The market experienced a significant decline in revenue in FY2008 and FY2009, but has strengthened in recent years, with indications of recovery via growth in tenant demand and rental values. Recent increases in local and international investor activity has further supported asset prices6. Offices can be segmented into four key categories according to quality and location: prime CBD secondary CBD prime suburban secondary suburban6.
6 IBISWorld Office Property Operators in Australia, August 2012
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102 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Australian office segmentation by quality and location, and by tenant industry, is set out in the figures below.
Figure 3: Australian office segmentation by quality and Figure 4: Australian office segmentation by tenant industry location FY2012 FY2012
5% 4% 5%
17% 23% 28%
17%
17%
22% 17%
28% 17%
Secondary CBD offices Prime CBD offices Government Finance and Insurance services Secondary suburban and regional offices Prime suburban and regional offices Mining, utilities and industrial businesses Property and business services Secondary other major market offices Prime other major market offices IT and communications services Other Source: IBISWorld Office Property Operators in Australia, August 2012 Government, finance and insurance services combine to make up approximately 45.2% of the market. Mining, utilities and industrial businesses, with recent office demand driven by the mining boom, make up a combined 17.4% of the market.
3.2.2 Key drivers of the commercial property market The primary determinant of office demand is the size and growth of the white collar labour workforce. Improvements in domestic and international economic growth drive corporate profits, which in turn supports workforce expansion. This strengthens the demand for office space and supports improved rental returns and market values. Key supply side factors influencing the Australian commercial property market include: vacancy levels – low vacancy levels influence developers’ decisions to enter the market and supply new property availability of funding – a shortage of available capital results in lower growth as investment in additional properties is limited interest rates – low interest rates encourage greater investment in property, hence increasing supply of property assets, as investors shift their funds from cash into property construction and development rental rates – increased rental rates generally lead to an increase in the supply of commercial property as the expected return to investors improves costs of construction – costs of construction, including materials and labour, will influence the level of commercial property construction, and therefore overall supply.
3.2.3 Historical performance and outlook The commercial property market has been severely affected by the global financial crisis. Throughout FY2008 and FY2009, demand for office space fell significantly due to poor business sentiment and a decrease in white collar labour employment. This reduction in leasing demand resulted in falls in construction, investment demand, and rental and occupancy rates6. Property valuations were severely revised downwards to reflect these declining fundamentals. Demand for office space improved in FY2010 and FY2011, supported by a stronger than expected domestic economy and profit margins, and improvements in the job market. Property investment also improved as investors returned, buoyed by stronger profits and rising business confidence. The market has strengthened in recent years, with current indications of recovery via growth in tenant demand and rental rates. Improving local and international investor activity has further supported asset prices6.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 103 Expectations for future growth of the Australian commercial market are supported by: restricted supply due to unwillingness of developers to enter construction immediately following the global financial crisis7 improving general business conditions, driving tenancy demand ongoing expectations of growth in white collar labour employment less restrictive bank lending than that experienced during recent years increases in investor activity. 3.3 Australian retail property market
3.3.1 Overview The Australian retail property market includes entities engaged in the leasing of retail properties. Retail properties can be segmented according to outlet type: shopping centres bulky goods retailers hotels licenced clubs pubs. Australian retail property segmentation by outlet type (calculated by revenue) is set out in Figure 5.
Figure 5: Australian retail segmentation by outlet type FY2012
8%
21% 40%
31%
Shopping centres Other retailers Bulky goods retailers Hotels, licenced clubs and pubs
Source: IBISWorld Retail Property Operators in Australia, June 2012 Shopping centres are the largest single provider of retail goods and services in Australia by revenue, making up approximately 40% of the retail market. This is followed by other retailers, consisting predominantly of shop fronts in strip locations, making up 31% of the market. The retail buyers’ market consists of three key groups: food retailers hospitality and service retailers household goods retailers.
7 National Australia Bank, Quarterly Australian Commercial Property Survey, March 2012
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104 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting The remaining groups include department stores, household goods retailers and other remaining retailers. Australian retail property segmentation by retail group is set out in Figure 6.
Figure 6: Australian retail segmentation by retail group FY2012
7%
8%
37% 13%
17%
20%
Food retailers Hospitality and service industries Household goods retailers Other retailers Clothing and footwear retailers Department stores
Source: IBISWorld Retail Property Operators in Australia, June 2012 Food retailers make up the largest portion of the market and consist predominantly of supermarkets. Hospitality and service industries include cafes, restaurants, food services, hotels, clubs and pubs. It is reliant upon discretionary spending, and is heavily exposed to prevailing and expected economic conditions. Household goods retailers include furniture, electrical and hardware suppliers.
3.3.2 Key drivers of the retail property market The primary determinant of retail property demand is the demand for retail goods and services. Retail sales drive industry revenue and place demand pressure on retail space. This demand affects occupancy, rental and sales rates and, ultimately, property values8. Other key factors influencing the Australian retail property market include: consumer sentiment – consumers’ willingness to spend affects retail demand and sales volumes, which affects business and industry revenue and ultimately rental rates, occupancy, property values and yields8 business confidence – high confidence supports business decisions to expand existing locations or add additional retail locations, increasing demand for retail property interest rates – low interest rates encourage greater investment in property, as investors shift their funds from cash into property construction and development9 emergence of online shopping – increased competition from online retailers draws sales from traditional retail properties exchange rates – increased competition from foreign retailers due to a strong Australian dollar draws sales from traditional domestic retail properties.
3.3.3 Historical performance and outlook The retail property market has been broadly affected by the global financial crisis, with falling retail sales and an associated drop in demand for retail property. The industry was further affected by restrictions in property lending by banks and the practice of providing rental incentives10 to support demand from existing and new tenants.
8 IBISWorld Retail Property Operators in Australia, June 2012 9 Colliers International, Research & Forecast Report: Australian Retail, 2012 10 National Australia Bank Quarterly Australian Commercial Property Survey, March 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 105 Prior to 2008, many retail property owners expanded quickly, resulting in an oversupply of retail property which continues to exist today. In response to the global financial crisis, the industry reduced costs and capital expenditure. This included delaying projects, selling assets, reducing staff and limiting non-essential expenditure8. Poor retail conditions following the global financial crisis resulted in less demand for retail property, adversely affecting rental rates, occupancy rates, property yields and property values. FY2009 was characterised by stable rental rates associated with marginally improved market conditions, limited rental growth, and increases in occupancy rates associated with limited recent retail property development. The difficult retail environment was partially offset by the Commonwealth Government stimulatory package and historically low interest rates. FY2010 saw a firming of rental yields driven primarily by asset value growth. The retail property market has improved moderately in recent times, after difficult conditions following the global financial crisis. As the retail property market is driven by the demand for retail goods and services, broad domestic economic performance and conditions have a significant impact. Expectations for ongoing moderate market growth are supported by: restricted property supply due to limited construction immediately following the global financial crisis improving general business conditions, driving tenancy demand improving domestic economic performance and consumer sentiment and associated increases in demand for retail goods and services less restrictive bank lending. Ongoing growth expectations are tempered by the emergence of on-line retailers. 3.4 Australian industrial property market
3.4.1 Overview The Australian industrial property market includes those firms participating in transportation, warehousing, distribution, logistics and manufacturing production. The industry has also been heavily affected by the global financial crisis which resulted in reduced demand for industrial products and, consequently, weakened demand for industrial property space. The market is slowly returning to growth following improvements in the domestic economy11. Industrial property can be segmented into the following key categories according to use11: warehouse and distribution centres manufacturing buildings and factories logistics centres agriculture and aquaculture technology parks other buildings.
11 IBISWorld Industrial and Other Property Operators and Developers in Australia, July 2012
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106 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Warehousing and distribution is the largest industry user, providing approximately 46% of industrial property revenues11. Australian industrial property segmentation by industry revenue is set out in Figure 7.
Figure 7: Australian industrial property segmentation by revenue FY2012
13%
4%
46% 17%
20%
Warehouses and distribution centres Secondary production buildings and factories Logistics centre Agriculture and Aquaculture buildings Other
Source: IBISWorld Industrial and Other Property Operators and Developers in Australia, July 2012
3.4.2 Key drivers of the industrial property market The primary determinant of industrial property demand is demand for industrial products. This demand is supported by strength across domestic economic conditions as measured by gross domestic product, domestic employment, wage levels and business confidence. Improvements in these areas support business expenditure and requirements for industrial space for manufacturing, imported products and inventory storage11. Other key factors influencing the Australian industrial property market include: business confidence – high confidence supports business decisions to expand existing locations or add additional industrial locations, increasing demand for industrial property interest rates – low interest rates encourage greater investment in property, hence increasing supply of property assets, as investors shift their funds from cash into property construction and development total merchandise imports and exports – high trade levels require industrial property for storage, distribution and manufacturing, increasing demand for industrial property inventory levels – high demand for downstream industrial products increases required inventory storage and demand for industrial property exchange rates – strong exchange rates support demand for imported goods and demand for industrial properties required for storage and distribution of these goods.
3.4.3 Historical performance and outlook Industrial property revenues fell significantly in FY2009 due to reductions in product trade, manufacturing, inventories and business investment resulting from the global financial crisis. Demand for industrial property stabilised in FY2010, with small increases in revenues, driven by improvement in the domestic economy11. In FY2011, the industrial property market continued to stabilise, with rental levels and values holding steady. However, business continued to be cautious, in many cases choosing to extend existing leases rather than expand or move to new premises12.
12 Knight Frank, Sydney Industrial Market Overview, November 2011
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 107 Expectations for ongoing industrial property demand are supported by: improving general business conditions supporting demand for industrial products renewed access to bank lending ongoing demand for industrial property investments from superannuation funds growth of online retail industry requiring industrial property for logistic and warehousing operations13 supply conditions tightening due to limited development and construction in recent years.
13 Knight Frank, Sydney Industrial Market Overview, November 2011
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108 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4 Profile of Cromwell Property Fund 4.1 Overview CPF is a diversified property fund and aims to provide tax-deferred distributions from its Australian property portfolio. It has a mandate to invest in Australian non-residential property. As at 30 June 2012, CPF held an investment property portfolio valued at $168.4 million, with 64% of the value relating to commercial property, 23% to retail property and 13% to industrial property. 4.2 History CPF was launched in June 2006, with initial funding provided by the CDPT through a $20 million equity investment and the provision of an $80 million loan facility. Between June 2006 and December 2008, an additional $140 million (net of redemptions) was raised from external investors, combined with an additional $10 million in equity raised from CDPT. Between June 2006 and December 2007, these funds, combined with further bank lending, were used to acquire a portfolio of 11 properties valued at approximately $445 million14. Total bank lending as at 30 June 2007 was $273 million. The global financial crisis had a significant impact on CPF and its underlying property holdings. Property rentals and market valuations fell in an environment of lower tenancy demand, and the availability of equity and debt funding reduced, with costs of equity and debt capital increasing significantly. Lower market valuations resulted in a fall in NTA, significantly increasing CPF’s gearing. This, in turn, put pressure on CPF as it came close to breaching debt covenants, including LVRs. In January 2009, CPF suspended applications and withdrawals (although unit transfers were still available to CPF Unitholders) and reduced distributions to existing unit holders. In August 2009, all distribution payments were suspended. At this time, the CPF RE ceased charging management fees to CPF. Between March 2010 and November 2010, approximately $200 million of property assets were sold to reduce debt levels. In September 2010, distributions recommenced at an annualised rate of 2 cents per unit. As at 30 June 2012, CPF had an NTA per unit of 16 cents. This compares to unit pricing in the range of 85 cents and 104 cents for units issued to investors since the inception of the Fund. As at July 2012, CPF had again suspended distributions due primarily to the financial failure of the major tenant at the Smithfield property. On 8 August 2012, Cromwell announced it is in negotiations for the potential acquisition of all the units in CPF that it does not already own. 4.3 The Properties CPF holds five direct property investments as set out below15: 43 Bridge Street, Hurstville, New South Wales (NSW) – a commercial building located in the South Sydney office precinct of Hurstville. The property is 87% tenanted by NSW State Government, following a recent extension of a five year option. There are currently two vacant tenancies totalling 477 square metres. The property was marketed for sale in March 2012, however was unsuccessful Homebase Prospect, Prospect, NSW – a retail bulky goods centre located in the western Sydney suburb of Prospect, with 25,874 square metres of lettable area 13 Keltie Street, Woden, Australian Capital Territory (ACT) – a 22-level office located in the town centre of Woden in Canberra. The property is 99% leased until June 2016 to the Commonwealth Government 28 Percival Road, Smithfield, NSW – an industrial property located in the western Sydney suburb of Smithfield, consisting of high and low clearance warehouse space and a freestanding office block. The primary tenant has recently failed and the property is currently substantially vacant. Negotiations are currently underway with a replacement tenant, but there is no certainty a lease agreement will be concluded and a new tenant would not begin paying rent until at least April 2013. The property was marketed for sale in March 2012, however was unsuccessful
14 Cromwell Property Fund, Product Disclosure Statement (PDS), 2007 15 Cromwell Property Fund, Strategic Review, 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 109 13-25 Sturton Road, Edinburgh Park, South Australia (SA) – two vacant industrial allotments totalling 45,000 square metres in Adelaide. The table below sets out key parameters for each of CPF’s direct property investments.
Table 3: The Properties Carrying value Capitalisation Property ($ million) Valuation date Property sector rate WALE Key tenant(s) State Property Hurstville, NSW 34.50 December 2011 Commercial 9.50% 4.3 years Authority Fantastic Furniture, Prospect, NSW 38.50 June 2012 Retail 10.75% 3.3 years Good Guys Commonwealth of Woden, ACT 73.00 June 2012 Commercial 9.50% 4.0 years Australia Smithfield, NSW 19.70 June 2012 Industrial 10.25% 0.5years n/a Edinburgh Park, SA 2.70 December 2011 Industrial n/a n/a n/a
Source: CPF
Note: 1. n/a = not available The Properties have a mix of government, semi-government and corporate tenants, and a range of lease terms and agreements. The current WALE for the portfolio is 3.7 years16. 4.4 Group structure The figure below sets out a simplified ownership structure for CPF.
Figure 8: CPF group structure as at June 2012
Source: CPF Cromwell is a stapled entity comprising CCL and CDPT and owns a 17.6% interest in CPF. The remaining 82.4% in CPF is held by investors external to the Cromwell. CPF RE is wholly owned by Cromwell Property Group and acts as responsible entity for CPF.
16 Cromwell Property Fund, Quarterly Report: Issue 1, 2012
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110 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4.5 Responsible entity CPF RE is the responsible entity for CPF and holds an Australian Financial Services Licence allowing it to operate direct property and property securities funds. In accordance with the CPF constitution, the managers of the Fund are entitled to fees associated with asset management, acquisitions of real property or entities holding real property assets, contribution fees on applications for units in CPF, performance fees over a suitable benchmark, and fees upon sale of a controlled real property asset or entity holding real property assets. In August 2009, the CPF RE ceased charging management fees to CPF, following the cessation of distribution payments to CPF Unitholders. When distribution payments were resumed in September 2010, the CPF RE reinstated discounted management fees, charging 0.1375% per annum (pa) of the total assets of CPF as opposed to 0.55% pa of the total assets of CPF quoted in the constitution. Management and administration costs for CPF totalled $657,000 in FY2011, and $675,000 in FY2012, of which management fees to CPF were approximately $220,000 and $240,000 respectively. 4.6 Unitholder profile As at 9 July 2012, CPF had approximately 171 million units on issue. Cromwell has the largest holding, with approximately 17.6% of total units issued. The balance of the units is widely held, with no other single CPF Unitholder owning more than 5.0% of issued capital. CPF’s top ten Unitholders are set out in the following table.
Table 4: CPF’s top ten Unitholders at 9 July 2012
Unit holder Units % of total units Cromwell 30,020,040 17.6% Bond Street Custodian Limited 7,952,539 4.7% Netwealth Investments Limited 2,672,973 1.6% BT Portfolio Services Limited 2,472,563 1.4% Private investor 2,283,385 1.3% Private investor 1,243,895 0.7% Private investor 1,020,000 0.6% Netwealth Investments Limited 1,018,327 0.6% Private investor 1,000,000 0.6% Private investor 800,000 0.5% Total – top ten CPF Unitholders 50,483,725 29.5% Total - other CPF Unitholders 120,516,977 70.5% Total units on issue 171,000,702 100.0%
Source: CPF
4.6.1 Unit issuance CPF is not currently issuing units. Historically, the issue price for new or additional investments was calculated each business day by CPF RE to reflect the value of the underlying investments plus investment income and unrealised or realised capital gains, less any fees and taxes that CPF RE was required to deduct. This was calculated by dividing the net asset value of CPF by the number of units on issue, adjusted for transaction costs incurred. Net asset value is determined in accordance with the CPF constitution and is based on the value of CPF’s assets less liabilities. All direct property investments are independently valued. Costs associated with the acquisition of properties are recognised as assets and amortised over the period CPF RE reasonably expects CPF to hold each property. In May 2012 the unit pricing policy was amended and all remaining unamortised acquisition costs were written off.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 111 4.6.2 Unit redemptions CPF has currently suspended unit redemptions. Historically, redemptions operated under a limited monthly withdrawal system under which CPF RE aimed to meet valid withdrawal requests lodged on or before the last day of a month within 15 days of the end of that month. Withdrawals were capped at 0.5% of net assets in a month. The withdrawal price was calculated monthly, by dividing the net asset value of CPF by the units on issue, adjusted for transaction costs incurred by CPF. Unit transfers may occur between CPF unit holders, although these are negotiated and arranged independently of CPF.
4.6.3 Distributions CPF has currently suspended distributions. CPF was launched in June 2006 with distributions of 8 cents per unit per annum, paid monthly. In January 2009, distributions fell to 7 cents per unit due to the failure of Raptis Group. CPF ceased paying distributions in August 2009. Distributions recommenced in September 2010 at 2 cents per unit. CPF announced in July 2012 that distributions would again cease, following the failure of the primary tenant at the Smithfield property. The Fund is not expected to be in a position to recommence distributions until the LVR for its Bank Loan facility is reduced and the majority of the remaining vacancy at Smithfield is leased and the associated costs paid.
CPF RE may determine distribution levels at its discretion and with regard to current and future expected income and expenses of CPF, and may determine not to distribute all income of CPF.
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112 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4.7 Financial performance The audited income statement of CPF for the financial years ended 30 June 2010, 30 June 2011 and 30 June 2012, are summarised in the table below.
Table 5: Financial performance of CPF
Actual Actual Actual FY2010 FY2011 FY2012 ($’000) ($’000) ($’000)
Revenue and other income Rental income and recoverable outgoings 36,545 21,309 19,978 Interest 205 302 121 Other revenue 61 11 199 Share of profit of equity accounted entity 1,613 138 - Fair value net gain from interest rate derivatives 1,418 890 - Net gain/(loss) on sale of investment property - 65 - Other income 8,929 32 (52) Total revenue and other income 48,771 22,747 20,298
Expenses Property expenses and outgoings 10,285 6,067 5,437 Management and administration costs 823 656 748 Interest 20,948 12,640 10,011 Amortisation (loan transaction costs) 709 609 357 Fair value net loss from: - Investment properties 9,642 8,285 1,577 - Investment property under construction 5,230 - - - Interest rate derivatives - - 2,884 Decrease in receivable from related entity - - 200 Total expenses 47,637 28,257 21,214 Profit (loss) 1,134 (5,510) (916)
Earnings per unit 7.6 2.2 2.9 Distributions per unit 0.6 1.7 2.0
Source: CPF, Full Year Financial Report 30 June 2011 and 30 June 2012 We note the following in relation to the financial performance of CPF: progressive asset sales of six properties worth approximately $200 million in FY2010 and FY2011 resulted in falling rental income and recoverable outgoings, partially offset by falling property expenses and outgoings and reduced interest costs as debt balances were repaid. Net rental income (property rental income and recoverable outgoings less property expenses and outgoings) decreased from $26.3 million (FY2010) to $15.2 million (FY2011). Net rental income for FY2012 was $14.5 million income and expenses noted for FY2012 relate to the current portfolio of five properties (including the vacant Edinburgh Park industrial allotment property) fair value net losses from investment properties totalled $9.6 million (FY2010), $8.3 million (FY2011) and $1.6 million (FY2012). These losses relate to revisions to the valuations of properties held net of associated capital expenditure, leasing costs and statutory accounting adjustments for straight-lining of rental income interest expenses fell in FY2011, due to a significant reduction in borrowings from $329.9 million (as at 30 June 2010) to $134.6 million (as at 30 June 2011)
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 113 interest expenses decreased marginally to $10.1 million in FY2012 due to lower variable interest rates, as only a portion of the debt is hedged. Current borrowings as at 30 June 2012 are $135.7 million earnings per unit decreased from 7.6 cents per unit in FY2010 to 2.2 cents and 2.9 cents per unit in FY2011 and FY2012, respectively, as a result of the lease expiry and associated vacancy at Exhibition Street, Melbourne. This property was subsequently sold in 2010 in FY2010, only one month of distributions were declared in July 2009 at an annual rate of 7 cents per unit before distributions were suspended. Distributions recommenced in September 2010 at 2 cents per unit. CPF announced in July 2012 that distributions would again cease, following the failure of the primary tenant at the Smithfield property.
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114 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 4.8 Financial position The audited balance sheet of CPF as at 30 June 2010, 30 June 2011 and 30 June 2012, are summarised in the table below.
Table 6: Financial position of CPF
Actual Actual Actual 30 June 2010 30 June 2011 30 June 2012 ($’000) ($’000) ($’000)
Current assets Cash and cash equivalents 1,979 2,683 2,002 Trade and other receivables 8,192 880 664 Other current assets 890 371 367 Investment properties held for sale 166,750 - - Investment in jointly controlled entity held for sale 24,935 - - Total current assets 202,746 3,934 3,033
Non-current assets Investment properties 173,250 168,100 168,400
Total assets 375,996 172,034 171,433
Current liabilities Trade and other payables 4,049 5,015 4,069 Derivative financial instruments 1,575 685 1,779 Distributions payable - 299 325 Borrowings 329,873 134,646 26,652 Other current liabilities 952 203 940 Total current liabilities 336,449 140,848 33,765
Non-current liabilities Borrowings - - 109,051 Derivate financial instruments - - 1,790 Total non-current liabilities - - 110,841
Total liabilities 336,449 140,848 144,606
Net assets 39,547 31,186 26,827
Equity Contributed equity 164,465 164,465 164,443 Accumulated losses (124,918) (133,279) (136,700) Current year profit - - (916) Total equity 39,547 31,186 26,827
Book value gearing (total debt / total assets) 87.7% 78.3% 79.4% NTA value per security (cents per security) 23.11 18.23 15.68
Source: CPF, Full Year Financial Report, 30 June 2011 and 30 June 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 115 We note the following in relation to the financial position of CPF:
trade and other receivables decreased from $8.2 million (as at 30 June 2010) to $0.9 million (as at 30 June 2011). The bulk of the 2010 balance related to payments receivable from Cromwell for the amount of $6.8 million. Trade and other receivables were $0.7 million as at 30 June 2012 investment property balances decreased from a combined value of $340.0 million (as at 30 June 2010) to $168.1 million (as at 30 June 2011). This was predominantly the result of investment property sales during FY2011. Slight increases in property value, from revaluation of the portfolio, has resulted in a small increase in the investment property balance to $168.4 million as at 30 June 2012 borrowings decreased significantly in FY2011, from $329.9 million (as at 30 June 2010) to $134.6 million (as at 30 June 2011), driven predominantly by debt repayments made from the proceeds of investment property sales. Ongoing borrowings increased marginally to $135.7 million as at 30 June 2012. The Bank Loan of $112.0 million was extended in May 2012 for a further 3 years reclassifying the debt as non-current. 4.9 Debt structure At 30 June 2012, CPF had borrowings totalling $136.1 million and a gearing ratio (total debt to total assets) of 79.4%. A summary of debt facilities are noted in the table below.
Table 7: CPF debt facilities
Facility limit Facility drawn Loan Facility ($’000) ($’000) Expiry Bank Loan 112,250 112,250 31 May 2015 Cromwell Property Loan 19,800 19,800 30 September 2012 Cromwell Industrial Property Loan 4,063 4,063 n/a Total 136,113 136,113
Source: CPF Current loans of $23.9 million make up 17.6% of total borrowings. The debt structure of CPF consists of loan facilities provided by a major Australian bank (Bank Loan) and two Cromwell loans (Cromwell Property Loan and Cromwell Industrial Property Loan). The Bank Loan is secured by a first mortgage over the Properties (including Edinburgh Park industrial land). It is the only loan subject to financial covenants. The Cromwell Property Loan facility represents the remainder of original seed capital provided to assist CPF to acquire its initial properties by way of convertible financing units. The facility is unsecured and expires in September 2012. The current intention of CPF is to negotiate a further extension with Cromwell to enable the Fund to consider other options in the event the Proposed Transaction does not proceed. The Cromwell Industrial Property Loan was used to fund the purchase of three industrial land parcels, of which two have been sold and the facility substantially reduced. This facility is repayable on demand, but Cromwell will not call for repayment unless, or until, CPF has sold or otherwise dealt with the remaining industrial land. The LVR on the Bank Loan is required to be 70% or below, reducing to 65% or below by 30 June 2013. This was negotiated prior to CPF exceeding the previous 65% LVR. At 30 June 2012, CPF’s LVR was 66.7%, based on the most recent independent valuations. Inclusive of the Cromwell loans, CPF’s total gearing (total debt to total assets) was 79.4% as at 30 June 2012. For the period of the loan term in which the LVR is above 65% (no later than 30 June 2013), the facility is subject to an additional 15 basis point charge above the existing interest margin agreement. Interest payable on each of the loans is made up of two components, the market interest rate and the facility interest margin. The market rate can be fixed or otherwise hedged for a period of time. The market rate on CPF’s current borrowings is 66% hedged for FY2013. The current weighted average margin across all facilities is 2.4%. The interest rate margin is generally set on each facility for the term of that facility, by the lender. However the margin can change during the facility term if other loan terms are changed or renegotiated, or if the loan is in default.
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116 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5 Profile of Cromwell Property Group 5.1 Overview Cromwell is a stapled entity which listed on the ASX on 12 December 2006. The operations of Cromwell primarily relate to property investment and management, the promotion and management of property related investment funds and property development. 5.2 History Cromwell listed on the ASX on 12 December 2006 as a stapled security comprising CCL and CDPT. This listing occurred following the merger of CDPT with five Cromwell managed syndicates and the further stapling of this consolidated trust to CCL. Prior to this time, CCL had been listed on the ASX since 1971. In 2007 Cromwell divested three major assets including Village City Centre in Melbourne, Bundall Corporate Centre (and associated development site) on the Gold Coast, Queensland and 59 Goulburn Street in Sydney. Cromwell acquired an inner city commercial development site in Brisbane with plans to fund, construct, and retain a commercial building on this site. In 2008, Cromwell acquired Tuggeranong Office Park in Canberra and expanded its funds management operations, launching the Cromwell Phoenix Property Securities Fund in partnership with Phoenix Portfolios Pty Limited. Following concerns regarding debt markets, Cromwell refinanced its commercial mortgage-backed security facility before expiry of the term. Cromwell raised $91 million for the Cromwell Riverpark Trust in 2009 and construction began on the Riverpark Building. In December 2009 Cromwell completed a placement of $73.3 million of stapled securities to Redefine Australian Investments Limited at 70 cents per security, a discount of 5.4% to the Cromwell Security closing price on 23 December 2009, being the day before the placement. In 2010 Cromwell acquired two property assets from CPF. Cromwell also raised $75.4 million through a placement and rights issue to purchase the Qantas Global Headquarters in Mascot, NSW. In March 2011, Cromwell undertook a further placement of $35.4 million stapled securities at a price of 71 cents per security (7% discount to VWAP at the time) to selected securityholders and institutional investments, with 70% issued to Redefine Australian Investments Limited. It also refinanced $531 million of its debt facilities approximately six months prior to expiry of the term. This refinance was completed to minimise debt due within twelve months and to provide visibility to the market prior to term end. In December 2011, Cromwell acquired HQ North in Brisbane and launched the Cromwell Ipswich City Heart Trust, which owned the City Heart Building under construction in Ipswich, and re-acquired the Bundall Corporate Centre in January 2012. During this period, Cromwell raised a further $133 million through a rights issue and placements. On 8 August 2012, Cromwell announced it is in negotiations for the potential acquisition of all the units in CPF that it does not already own. 5.3 Property assets As at 30 June 2012, Cromwell held a direct investment property portfolio of 22 properties, valued at $1.72 billion, comprising commercial, industrial and retail real estate located throughout Australia. Descriptions of these properties are set out below along a summary of their key parameters: Commercial – Queensland HQ North Tower, Fortitude Valley – a 10 level office tower located two kilometres from the Brisbane CBD 200 Mary Street, Brisbane – a 19 level office tower located in Brisbane’s CBD. The building serves as the head office of Cromwell Property Group Bundall Corporate Centre, Gold Coast – two office towers and surrounding land available for development Terrace Office Park, Bowen Hills – two office towers located on the border of Bowen Hills and Fortitude Valley, approximately two kilometres from Brisbane’s CBD
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 117 Synergy, Kelvin Grove – an office building located in Kelvin Grove Urban Village, two kilometres from the Brisbane CBD.
Table 8: Commercial property assets – QLD Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
HQ North Tower 194.00 June 2012 8.13% 6.2 years AECOM, Technology One, Bechtel Australia, CS Energy 200 Mary Street 87.00 June 2012 8.25% 2.6 years Queensland Department of Public Works, Commonwealth Government, QER Pty Ltd Bundall Corporate Centre 65.30 December 2011 11.00% 4.7 years Wyndham Vacation Resorts Asia Pacific, Professional Investment Services Terrace Office Park 26.50 December 2011 8.50% 1.9 years NEC, MEGT Synergy 73.00 October 2011 8.75% 5.1 years Queensland University of Technology
Source: Cromwell Commercial - Victoria 700 Collins Street, Melbourne – 12 levels of office accommodation and 3 levels of car parking and various retail areas located in the Docklands Precinct at the western end of the Melbourne CBD 321 Exhibition Street, Melbourne – a 20 level office tower in Melbourne’s CBD. A major refurbishment was completed in mid-2011 and the office tower is fully leased to Origin Energy 380 Latrobe Street, Melbourne – an 18 level office complex.
Table 9: Commercial property assets – VIC Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
700 Collins Street 172.40 December 2011 7.50% 3.1 years Bureau of Meteorology, Medibank Private 321 Exhibition Street 170.00 November 2011 7.50% 9.4 years Origin Energy 380 Latrobe Street 107.00 June 2012 8.00% 2.6 years Agrium Asia Pacific Services, Australian Taxation Office
Source: Cromwell Commercial – New South Wales Qantas Global Headquarters, Mascot – four purpose built buildings positioned near Sydney airport. Qantas has extended its lease until 2032 475 Victoria Avenue, Chatswood – two 13 level office buildings located approximately 11 kilometres from the Sydney CBD with ground floor retail and three levels of basement car parking, inclusive of freestanding annexe building and gardens separating the two office towers.
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118 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Table 10: Commercial property assets – NSW Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
Qantas Global Headquarters 198.80 October 2011 7.25% 20.5 years Qantas Airways Limited 475 Victoria Avenue 135.00 June 2012 8.25% 4.6 years Reed Elsevier Australia, Evans & Peck, Leighton Contractors
Source: Cromwell Commercial – Australian Capital Territory
Tuggeranong Office Park, Greenway – a property comprising five buildings of up to four stories fully leased to the Commonwealth Government until 2016 TGA Complex, Symonston – two buildings currently leased to The Therapeutic Goods Administration (TGA) until 2017, located approximately 8 kilometres from the Canberra CBD. The building is used as office and laboratory space 19 National Circuit, Barton – an office building located in Canberra’s parliamentary precinct Oracle Building, Lyneham – a commercial office complex two kilometres north of the Canberra CBD.
Table 11: Commercial property assets – ACT Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
Tuggeranong Office Park 173.00 June 2012 8.50% 4.5 years Commonwealth Government TGA Complex 70.00 June 2012 9.50% 4.8 years Therapeutic Goods Administration 19 National Circuit 32.00 June 2012 8.50% 6.3 years Commonwealth Government Oracle Building 28.50 June 2012 10.00% 2.9 years Verizon Business, Crimtrac, Oracle, SMEC
Source: Cromwell Commercial – South Australia 101 Grenfell Street, Adelaide – an office building in Adelaide’s commercial office precinct Henry Waymouth Centre, Adelaide – a 13 level office building located in Adelaide CBD.
Table 12: Commercial property assets – SA Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
101 Grenfell Street 43.20 December 2011 8.75% 5.8 years SA Government Henry Waymouth Centre 32.00 December 2011 8.00% 15.4 years WorkCover South Australia
Source: Cromwell
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 119 Commercial – Tasmania Vodafone Call Centre, Kingston – a purpose built call centre facility in a light-industrial area located approximately 15 kilometres south of the Hobart CBD.
Table 13: Commercial property assets – Tasmania Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
Vodafone Call Centre 15.30 December 2011 10.00% 4.3 years Vodafone
Source: Cromwell Industrial Brooklyn Woolstore, Brooklyn, VIC – an industrial building located 10 kilometres west of the Melbourne CBD NQX Distribution Centre, Pinkenba, QLD – distribution centre located in Brisbane’s Gateway precinct, is located approximately 10 kilometres from the Brisbane CBD Gillman Woolstore, Gillman, SA – a purpose built wool store, the property is operated by Australian Wool Handlers, and is located approximately 12 kilometres northwest of the Adelaide CBD.
Table 14: Industrial property assets Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
Brooklyn Woolstore 34.40 December 2011 9.50% 1.0 years Agrium Asia Pacific Services NQX Distribution Centre 26.50 June 2011 9.25% 3.4 years Toll Holdings Gillman Woolstore 15.00 December 2011 9.25% 9.0 years Australian Wool Handlers
Source: Cromwell Retail Regent Cinema Centre, Albury, NSW – a cinema complex with retail tenants being Village Cinemas Village Cinemas, Geelong, VIC – a cinema complex located in the main street of Geelong, in a commercial/entertainment precinct.
Table 15: Retail property assets Carrying value External Capitalisation WALE Key tenant(s) Property ($’millions) valuation date rate
Regent Cinema Centre 13.40 December 2011 9.00% 6.4 years Village Cinemas Village Cinemas 12.10 December 2011 9.25% 0.7 years Village Cinemas
Source: Cromwell
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120 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5.4 Funds management Cromwell currently manages four unlisted funds with funds under management (FUM) of approximately $420 million. These unlisted funds include: CPF Cromwell Riverpark Trust Cromwell Ipswich City Heart Trust. Cromwell is in the process of raising equity for this trust, which is expected to increase FUM upon completion Cromwell Phoenix Property Securities Fund. Funds management fees are typically charged as a percentage of gross assets under management (ranging from 0.60% to 0.82%). In addition, Cromwell also charges a registry and accounting fee, and a performance fee payable depending upon certain performance metrics (not applicable to the Cromwell Phoenix Property Securities Fund). Cromwell plans to expand its fund management business via further retail unlisted syndicates and the recent launch of a boutique wholesale real estate funds management enterprise named Cromwell Real Estate Partners (CREP). CREP will focus on delivering returns to wholesale investors through opportunistic real estate investment. Cromwell expects to co- invest approximately 10% equity in each of the wholesale funds managed. 5.5 Group structure The figure below sets out a simplified ownership structure for Cromwell.
Figure 9: Cromwell group structure as at June 2012
Source: Cromwell
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 121 Cromwell is a stapled entity comprising CCL and CDPT. The operations of each of CCL’s subsidiaries are summarised in the table below.
Table 16: Cromwell subsidiaries
Subsidiary entity Operations
Cromwell Property Securities Limited Responsible entity (CDPT and CPF) Cromwell Funds Management Limited Responsible entity (retail property funds) Cromwell Property Services Pty Limited Property management, facilities management, corporate real estate licensee Cromwell Operations Pty Limited Employer, finance, compliance, registry services Cromwell Real Estate Partners Pty Limited Wholesale property funds Phoenix Portfolios Pty Limited Wholesale property securities Cromwell Projects & Technical Solutions Pty Limited Property projects, due diligence Cromwell Capital Pty Limited Debt management
Source: Cromwell 5.6 Responsible entity CPSL acts as responsible entity for both CPF and CDPT. CPSL holds an Australian financial services licence allowing it to operate direct property and property securities funds. CPSL charges an internal responsible entity fee to Cromwell of 0.5% per annum. 5.7 Capital structure and unit holders As at 24 August 2012, Cromwell had the following securities on issue: 1,172,569,710 Cromwell Property Group stapled securities (ASX code: CMW) listed on the ASX 275,106 ordinary fully paid units in CDPT 7,413,243 performance rights. Details of the stapled securities, ordinary fully paid units in CDPT and performance rights are discussed below.
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122 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Securities Approximately 1.2 billion Cromwell Securities were on issue as at 24 August 2012. Redefine Australian Investments Limited, both directly and through their subsidiary Redefine Properties Limited, has the largest holding with approximately 27.0% of total stapled securities issued. The top ten holders of Cromwell Securities on the ASX as at 24 August 2012 are set out in the table below:
Table 17: Top ten Cromwell Security holders at 24 August 2012
Shareholder Number Percentage Shareholding (%)
Redefine Australian Investments Limited 270,580,778 23.1 Coronation Asset Management (Pty) Limited 58,737,725 5.0 Redefine Properties Limited 45,588,235 3.9 RJ Pullar (Director) and associates 15,921,167 1.4 PL Weightman (Director) and associates 14,000,000 1.2 Private investor 11,567,069 1.0 Colonial First State Asset Management (Australia) Limited 9,963,000 0.8 Private investor 7,282,126 0.6 Private investor 5,703,707 0.5 Private investor 3,948,087 0.3 Total top ten stapled security holders 443,291,894 38.2 Other stapled holders 729,277,816 61.8 Total stapled security holders – ASX listed 1,172,569,710 100.0
Source: Capital IQ Units in the Trust CCL holds 275,106 units in CDPT. Pursuant to ASIC relief, the units are not stapled to shares in CCL and are wholly held by CCL. Performance rights A Performance Rights Plan (PRP) was established in September 2007 by Cromwell. All full-time and part-time employees who meet minimum service, remuneration and performance requirements, including executive directors of Cromwell, are eligible to participate in the PRP at the discretion of the board of directors of Cromwell.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 123 As at 24 August 2012, Cromwell had the following performance rights on issue:
Table 18: Cromwell performance rights
Dated granted Exercise period Exercise price Expiry date Number
23/08/2010 21 August 2012 – 21 September 2012 $0.00 21/09/2012 170,287 23/08/2010 21 August 2012 – 21 September 2012 $0.10 21/09/2012 123,459 23/08/2010 21 August 2013 – 21 September 2013 $0.00 21/09/2013 101,378 23/08/2010 21 August 2013 – 21 September 2013 $0.10 21/09/2013 47,433 23/08/2010 21 August 2013 – 21 September 2013 $0.20 21/09/2013 95,894 07/03/2010 1 July 2013 – 1 August 2013 $0.00 01/08/2013 97,633 26/05/2011 1 July 2013 – 1 October 2013 $0.50 01/10/2013 1,913,333 26/05/2011 1 July 2014 – 1 October 2014 $0.50 01/10/2014 1,913,333 26/05/2011 1 July 2015 – 1 October 2015 $0.50 01/10/2015 1,913,333 05/09/2011 5 September 2014 – 5 October 2014 $0.20 05/10/2014 393,679 05/09/2011 5 September 2014 – 5 October 2014 $0.00 05/10/2014 590,622 05/09/2011 5 September 2014 – 5 October 2014 $0.10 05/10/2014 52,851 Total performance rights 7,413,236
Source: Cromwell At the current security price, exercise of one or more of the performance rights tranches will be dilutive to value. However, given the number of potential Cromwell Securities to be issued upon exercise of the performance rights totals 7.4 million which is equivalent to less than 0.6% of the total Cromwell Securities currently issued the potential dilutive impact is considered immaterial to security value. Distributions Cromwell pays distributions to security holders quarterly. Cromwell’s distribution history over the past five financial years is summarised in the table below.
Table 19: Cromwell distribution history
Distribution per security Implied distribution yield2 Financial year (cents) (%) FY2008 10.01 11.17% FY2009 9.0 16.67% FY2010 8.0 11.06% FY2011 7.0 9.92% FY2012 7.0 10.06%
Source: Capital IQ
Notes:
1. Consists of 9.0 cent distribution and 1.0 cent dividend from CCL 2. Distribution yield calculated as distribution per security/closing price of security at date of distribution payment
Cromwell has a current distribution policy of paying 90-95% of recurring earnings. This allows for retention of some earnings to facilitate leasing incentives and capital expenditure for property maintenance.
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124 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5.8 Security price performance A summary of the Cromwell Security recent price performance is provided in the table below:
Table 20: Cromwell quarterly security price information
High Low Last Trade Volume VWAP Quarter end date ($) ($) ($) (‘000) ($)
31-Mar-10 0.78 0.68 0.73 31,938 0.74 30-Jun-10 0.76 0.65 0.70 36,827 0.71 30-Sep-10 0.74 0.66 0.71 35,418 0.71 31-Dec-10 0.78 0.71 0.76 26,896 0.73 31-Mar-11 0.80 0.67 0.71 30,176 0.73 30-Jun-11 0.74 0.66 0.69 40,404 0.70 30-Sep-11 0.72 0.60 0.67 32,886 0.67 31-Dec-11 0.69 0.64 0.68 47,798 0.66 31-Mar-12 0.74 0.67 0.71 35,923 0.70 30-Jun-12 0.73 0.68 0.69 36,259 0.70 24-Aug-121 0.75 0.69 0.74 41,146 0.71
Source: Thomson Reuters
Note: 1. Relates to the period from 1 July 2012 to 24 August 2012 In the twelve months prior to the announcement of the Proposed Transaction, approximately 3.4 million Cromwell Securities were traded on average each week on the ASX. This equates to an average weekly trading volume of approximately 0.32% of the total Cromwell Securities on issue during the period, or 16.5% traded over the 12 month period (or 22.6% traded over the 12 month period excluding the cornerstone investment held by Redefine Australian Investments Limited and its subsidiary Redefine Properties Limited). Daily security price movements and trading volumes for the two years prior to the announcement of the Proposed Transaction are presented in the graph below, in addition to a summary of key announcements outlined below.
Figure 10: Cromwell Security price activity 80 14 3
2 6 10 12 75 4 15 1 5 10 14
70 8 12 13
6 65 11 9 Daily Daily volume (millions) Daily Daily VWAP(cents per unit)
8 4 7 60
2
55 0
Daily volume (million) Daily VWAP (cents per unit)
Source: Thomson Reuters
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 125 Table 21: Cromwell’s recent security price announcements
Notes Date Description
1 23 August 2010 Cromwell completes settlement of its acquisition of the Qantas Headquarters building, acquired for $143 million. Cromwell enters unconditional contract to sell Village Cinema Centre in Hobart, Tasmania for $15.9 million. 2 15 February 2011 Cromwell sells the Scrivener Building at 7 Thynne Street, ACT for $9.5 million. 3 24 February 2011 Cromwell signs call option with Redefine Australia giving Cromwell the ability to call on Redefine Australia Investments Limited to subscribe for 35,000,000 Cromwell stapled securities, provided the issue of those securities would not result in Redefine Australia Investments Limited holding more than 22.9% of the Cromwell Property Group. 4 4 March 2011 Cromwell raises $35.4 million via issuance of 47,130,000 new Cromwell Securities. 5 12 May 2011 Cromwell refinances two secured debt facilities of $397.8 million and $132.7 million, extending debt maturity an additional three years for both. 6 16 May 2011 Additional trade volumes associated with the exit of a private investor and broker book-build. 7 17 June 2011 Additional trade volumes associated with Cromwell exiting the Financial Times and the London Stock Exchange (FTSE) index. 8 25 August 2011 Increase in trade volumes associated with institutional investor selling down position due to reduction in FUM. 9 22 November 2011 Cromwell announces acquisition of ‘HQ North’ office tower in Fortitude Valley, Brisbane for $186 million. Cromwell announces planned equity-raising of up to $145.4 million through combined placement and entitlement offer. 10 30 November 2011 Increase in trade volumes associated with cross transfer of units. 11 20 December 2011 Cromwell launches PDS to raise funds for Cromwell Ipswich City Heart Trust. This trust is to be managed by Cromwell. 12 23 December 2011 Cromwell enters arrangement to re-acquire the Bundall Corporate Centre on the Gold Coast at a price of $63.4 million (which was previously sold for $106 million in 2007). 13 6 February 2012 Cromwell raised $36 million under the shortfall facility of the group’s one for six entitlement offer. 14 30 May 2012 Cromwell sells Masters Distribution Centre at Hoppers Crossing, Victoria for $39.3 million. 15 8 August 2012 Cromwell announced it is in negotiations for the potential acquisition of all the units in CPF that it does not already own.
Source: Connect4
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126 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5.9 Financial performance The audited income statements of Cromwell for the years ended 30 June 2010, 30 June 2011 and 30 June 2012 are summarised in the table below.
Table 22: Financial performance of Cromwell
Actual Actual Actual FY2010 FY2011 FY2012 ($’000) ($’000) ($’000)
Revenue and other income Rental income and recoverable outgoings 117,262 138,494 177,245 Fund management fee 9,283 3,964 4,567 Interest 6,265 4,984 4,713 Gain on sale of available-for-sale financial assets 3,431 - - Investments at fair value through profit/loss 836 604 - Distribution income 429 255 37 Share of profits of equity accounted entities 3,882 - - Loans receivable 1,932 - - Other revenue 524 16 341 Total revenue and other income 143,844 148,317 186,903
Expenses Property development costs 3,487 819 638 Property expenses and outgoings 19,260 21,198 27,087 Fund management commissions 3,274 141 487 Employee salaries and related costs 11,102 11,680 13,347 Property development inventories/provision 6,331 3,695 - Management and administration costs 1,736 1,568 5,496 Other operating Income/expense 3,945 4,428 Investment properties 32,146 (33,659) 12,570 Finance costs 40,529 47,439 64,523 Share of losses of equity accounted entities - 713 140 Interest rate derivative 1,283 1,920 38,483 Loss on sale of investment property 554 195 331 Lease Cost Amortisation - - 604 Provision for income tax 1,144 78 120 Total expenses 124,791 60,215 163,826
Profit 19,053 88,102 23,077
Earnings per security (cents) 2.5 9.6 2.2 Distributions per security (cents) 8.0 7.0 7.0
Source: Cromwell FY2011 and FY2012 annual report
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 127 We note the following in relation to the financial performance of Cromwell: rental income and recoverable outgoings increased from $117.3 million in FY2010 to $138.9 million in FY2011, driven by increased income derived from three additional properties purchased in FY2011. Net rental income (property rental income and recoverable outgoings less property expenses and outgoings) increased from $98.0 million (FY2010) to $117.3 million (FY2011). Net rental income for FY2012 increased to $138.1 million following the recent acquisition of several properties including Bundall Corporate Centre and HQ North in FY2010, Cromwell booked a fair value loss of $32.1 million following revised valuations of its underlying property portfolio. In FY2011, Cromwell booked fair value gains on its investment properties of $33.7 million, with a considerable portion of this driven by the increase in the fair value of 700 Collins Street, Melbourne, VIC of $10.1 million and Qantas Global Headquarters of $16.4 million. In FY2012, Cromwell booked a fair value loss of $12.6 million on revised property valuations net profit has fallen in FY2012 to $23.1 million. This decrease was principally driven by falling interest rates and the market revaluation of interest rate derivatives, increased finance costs and unfavourable investment property revaluations. Operating profit for FY2012 was $80.0 million, which excludes, amongst other items, non-cash market value adjustments, lease incentives and the impact of interest rate derivatives.
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128 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 5.10 Financial position The audited balance sheets of Cromwell as at 30 June 2010, 30 June 2011 and 30 June 2012, are summarised in the table below.
Table 23: Financial position of Cromwell
Actual Actual Actual 30 June 2010 30 June 2011 30 June 2012 ($’000) ($’000) ($’000)
Current assets Cash and cash equivalents 98,469 46,572 59,153 Trade and other receivables 17,988 9,918 21,505 Other current assets 4,008 2,962 1,851 Total current assets 120,465 59,452 82,509
Non-current assets Trade and other receivables 30,000 19,800 19,800 Inventories 4,925 3,000 3,000 Investment properties 1,064,100 1,444,850 1,724,400 Investments at fair value through profit/loss 3,987 4,177 266 Investments in jointly controlled entity and associates 56,802 5,492 4,752 Property, plant and equipment 1,262 1,133 1,327 Other non-current assets 1,287 1,524 1,547 Total non-current assets 1,163,650 1,481,500 1,755,092 Total assets 1,282,828 1,539,428 1,837,601
Current liabilities Trade and other payables 11,933 21,431 14,473 Borrowings 29,232 3,321 21,533 Dividends & Distributions Payable 16,157 16,883 20,470 Derivative Financial Instruments 3,626 3,430 40,628 Other Current Liabilities 12,640 8,338 8,103 Total current liabilities 73,588 53,403 105,207
Non-current liabilities Borrowings 637,354 780,288 942,644 Provisions 479 577 762 Total noncurrent liabilities 637,833 780,865 943,406 Total liabilities 711,421 834,268 1,048,613
Net assets 571,407 705,160 788,988
Book value gearing (total debt / total assets) 52.0% 50.9% 52.5% NTA asset value per security (cents per security) 70.67 73.03 67.32
Source: Cromwell FY2011 and FY2012 annual report
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 129 We note the following in relation to the financial position of Cromwell: cash and cash equivalents decreased $52.0 million during FY2011 as a result of property acquisitions during the year. As at 30 June 2012, cash had increased to $59.2 million as a result of an increase in operating profit, proceeds from an investment property sale and issuing equity through an entitlement offer investment property balances increased from a combined value of $1.1 billion (as at 30 June 2010) to $1.4 billion (as at 30 June 2011). This was predominantly the result of three sizeable investment property acquisitions during FY2011, with combined independent valuations of $355 million. As at 30 June 2012, the property portfolio was valued at $1.7 billion, an increase from 30 June 2011 primarily due to the acquisition of HQ North and Bundall Corporate Centre during the financial year borrowings increased in FY2011 from $666.6 million to $784.6 million, driven predominantly by the increase in debt funding to support acquisition of additional property investments. Borrowings increased in FY2012 to $964.2 million to support recent property acquisitions and the fit-out/refurbishment of the Qantas Global Headquarters. 5.11 Debt structure At 30 June 2012, Cromwell had borrowings totalling $964.2 million and a gearing ratio (total debt to total assets) of 52.5% per cent. Cromwell has previously stated that its targeted gearing level is in the range of 40% to 55%. Cromwell seeks to achieve the following in its debt structuring: maintain a spread of lenders across each of the four major Australian banks minimise debt due within twelve months select terms which achieve a suitable balance between cost efficiency and reasonable tenure. A summary of Cromwell’s debt facilities (as at the date of our report) are set out below:
Table 24: Cromwell’s debt facilities
Facility limit Facility drawn Loan Facility ($’000) ($’000) Expiry Current Bank loan – Tuggeranong (Tranche 2) 3,320 3,320 June 2013 Bank loan – Multi Property (Tranche 3) 15,000 13,913 December 2012 Bank loan – HQ North (Tranche 2) 9,100 9,100 June 2013 Non-Current Bank loan – Syndicate Finance 397,815 397,815 May 2014 Bank loan – Tuggeranong (Tranche 1) 107,917 107,917 June 2015 Bank loan – Multi Property (Tranche 1) 132,719 132,719 July 2015 Bank loan – Multi Property (Tranche 2) 100,000 98,654 July 2015 Bank loan – Mascot (Tranche 1) 62,400 62,400 December 2014 Bank loan – Mascot (Tranche 2) 83,750 17,840 December 2014 Bank loan – Mascot (Tranche 3) 47,720 - December 2014 Bank loan – HQ North (Tranche 1) 111,600 111,600 December 2014 Total 1,071,341 955,278
Source: Cromwell We note the following with regards to the various debt facilities held by Cromwell: the Syndicate Finance facility is secured by a first registered mortgage over the majority of the properties held by Cromwell and a registered floating charge over the assets of CDPT. Interest is payable on variable rates based upon a margin of 2.20% over the 30 day Bank Bill Swap Bid Rate (BBSY). Currently, the interest rate is effectively fixed through interest rate swap arrangements
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130 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting the Tuggeranong facility is secured by a first registered mortgage over the Tuggeranong Office Park investment and a registered floating charge over the assets of Tuggeranong Trust, a controlled entity of CDPT. Interest is payable on variable rates based upon a margin of 1.07% over the 30 day Bank Bill Swap Bid Rate BBSY. Currently, the interest rate is effectively fixed through interest rate swap arrangements the Multi Property facility is secured by a first registered mortgage over the Synergy, Mary Street, TGA and Exhibition Street investment properties. Interest is payable on variable rates based upon a margin of 2.25% over the 30 day BBSY. The interest rate is partially fixed through interest swap arrangements. Tranche 3 of this facility was repaid in July 2012 from cash reserves the Mascot facility is secured by a first registered mortgage over the Qantas Headquarters property. Tranche 1 is fully drawn. Tranche 2 and Tranche 3 will fund capital expenditure and agreed fit-out works for the property, for which the tenant will pay additional rent. The loan bears interest at variable rates based upon a margin of 1.7% over the 30 day BBSY. The interest rate is partially fixed at 3.24% through interest swap arrangements the HQ North facility is secured by a first registered mortgage over the HQ North investment property. The loan bears interest at variable rates based upon a margin of 2.0% over the 30 day BBSY. The interest rate is partially fixed at 4.94% through interest swap arrangements. Current loans of $26.3 million at 30 June 2012 have since reduced to $12.4 million with the repayment of Tranche 3 of the Multi Property facility in July 2012. This balance makes up less than 1.3% of total borrowings. Interest payable on Cromwell’s loans is made up of two components, the base rate and the facility interest margin. The current weighted average facility margin across all facilities is 2.03%.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 131 6 Valuation methodology 6.1 Valuation methodologies To estimate the fair market value of the securities in CPF and Cromwell we have considered common market practice and the valuation methodologies recommended by ASIC Regulatory Guide 111, which provides guidance in respect of the content of independent expert’s reports. These are discussed below.
6.1.1 Market based methods Market based methods estimate an entity’s fair market value by considering the market price of transactions in its securities or the market value of comparable entities. Market based methods include: capitalisation of maintainable earnings analysis of an entity’s recent security trading history industry specific methods. The capitalisation of maintainable earnings method estimates fair market value based on the entity’s future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from market transactions involving comparable entities. The capitalisation of maintainable earnings method is appropriate where the entity’s earnings are relatively stable. The most recent security trading history provides evidence of the fair market value of the securities in an entity where they are publicly traded in an informed and liquid market. Industry specific methods estimate market value using rules of thumb for a particular industry. Generally rules of thumb provide less persuasive evidence of the market value of an entity than other valuation methods because they may not account for entity specific factors.
6.1.2 Discounted cash flow methods Discounted cash flow methods estimate market value by discounting an entity’s future cash flows to a net present value. These methods are appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. Discounted cash flow methods are commonly used to value early stage entities or projects with a finite life.
6.1.3 Asset based methods Asset based methods estimate the market value of an entity’s securities based on the realisable value of its identifiable net assets. Asset based methods include: orderly realisation of assets method liquidation of assets method net assets on a going concern basis. The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to securityholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the entity is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the entity may not be contemplated, these methods in their strictest form may not necessarily be appropriate. The net assets on a going concern basis method estimates the market values of the net assets of an entity but does not take account of realisation costs. These asset based methods ignore the possibility that the entity’s value could exceed the realisable value of its assets as they ignore the value of intangible assets such as customer lists, management, supply arrangements and goodwill. Asset based methods are appropriate when entities are not profitable, a significant proportion of an entity’s assets are liquid, or for asset holding entities.
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132 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 6.2 Selection of valuation methodologies
6.2.1 CPF According to ASIC Regulatory Guide 111 (paragraph 15), the fair market value of the target securities should be determined on the basis of a knowledgeable and willing, but not anxious, seller that is able to consider alternative options to the proposed transaction (for example an orderly realisation of the target’s assets). Having regard to this, we have used the net assets on a going concern basis methodology to estimate the fair market value of a unit in CPF on a control basis. We are of the opinion that this is the most appropriate methodology to apply to value CPF on a control basis as, in addition to the guidance provided by ASIC, CPF is an externally managed passive direct investor in properties, and conducts no other active operations. Furthermore, valuations of the Properties were prepared as at 30 June 2012 which provide a reasonable basis upon which to assess their fair market value. Due to the sensitivity of our valuation of a CPF unit to the valuation of the Properties, we have also considered market evidence derived from our analysis of asset-based multiples (tangible assets/EBIT) observed in listed securities involving entities comparable to CPF to provide additional evidence of the fair market value of a unit in CPF. We consider it to be appropriate due to the following: the tangible assets/EBIT multiple is an ungeared multiple which ignores the capital structure (i.e. funding requirements) of an entity and based on our interpretation of ASIC Regulatory Guide 111, the funding requirements of an entity in financial distress (or with limited strategic alternatives available to it) should not be taken into account when determining the fair value of the target’s securities entities operating within the A-REIT sector have experienced significant financial difficulties since the onset of the global financial crisis due to declining property valuations and associated increasing gearing levels. The average gearing (total debt to total assets) of non-stapled entities within the sector is approximately 51.1%17, compared to the Fund which has total gearing (total debt to total assets) of 79.4% the listed security price of entities trading within the A-REIT sector are influenced by:
o continuing negative market sentiment and uncertainty around the global economic outlook and the impact on property values
o limited near term growth prospects in respect of: . rental growth expectations across most geographic regions and property sub-markets . acquisitions as high funding costs at present make accretive acquisitions difficult, even for vehicles with funding capacity . distributions, with lower payout ratios as a consequence of more prudent distribution policies amongst most A-REITs the majority of the listed securities involving entities comparable to CPF are trading at significant discounts to NTA, with the average discount to NTA for non-stapled entities within the sector as at 24 August 2012 being approximately 30%18. CPF has had an inconsistent distribution history since 2009, and in July 2012 distributions for the Fund were again suspended. This is consistent with the overall trend in the A-REIT sector, with the majority of listed A-REITs not paying distributions or at lower than historical distribution yields. Due to the above factors and having regard to our interpretation of ASIC Regulatory Guide 111, we do not consider cross-checks such as implied earnings multiples based on enterprise value/EBIT, distribution yields or price/adjusted funds from operations provide meaningful benchmarks against which to cross-check our valuation of CPF and therefore are not capable of being applied in this instance.
6.2.2 Cromwell In order to estimate the fair market value of the consideration to be received, we have relied upon an analysis of recent trading prices for Cromwell Securities as our primary methodology. Whilst this is in contrast to the net assets approach for estimating the fair market value of a unit in CPF, in our opinion, recent trading in Cromwell Securities provides a reasonable estimate of the fair market value of the consideration to be received by CPF Unitholders since:
17 Based on the Statement of Financial Position of comparable companies as at 31 December 2011 as sourced from Capital IQ 18 Capital IQ as at 24 August 2012
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 133 if the Proposed Transaction proceeds, CPF Unitholders will receive a minority or portfolio interest in Cromwell. The security trading price of Cromwell represents a minority value Cromwell is a stapled entity providing securityholders exposure to both direct property investments and the operations of its funds management and property management business (in comparison to CPF which is a passive property investment trust) which would not be fully captured by a typical net asset based approach any market re-rating or synergies arising as a result of the Proposed Transaction is likely to have an immaterial impact on the security price of Cromwell due to the relative scale of Cromwell’s operations and asset base compared to CPF. Therefore recent trading in Cromwell’s securities should represent an appropriate estimate for the Cromwell Security price if the Proposed Transaction proceeds there are no restrictions on CPF Unitholders disposing of their Cromwell Securities received pursuant to the Proposed Transaction subsequent to implementation of the Proposed Transaction whilst Cromwell Securities have lower liquidity compared to their listed peers, we still consider there to be sufficient liquidity to support the use of recent security trading as a primary valuation methodology. Further supporting this, there is a strong retail and institutional holder base as well as coverage from several research analysts; sufficient that recent security trading is an adequate benchmark for the current value of Cromwell Securities. To provide further evidence of the fair market value of the Cromwell Securities, we have also assessed the fair market value of a Cromwell Security using the capitalisation of maintainable earnings approach.
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134 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 7 Valuation of CPF 7.1 Summary We have estimated the fair market value of a unit in CPF to be in the range of 14.21 cents per unit to 16.19 cents per unit on a control basis. For the purpose of our opinion, fair market value is defined as the amount at which a security would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither being under a compulsion to buy or sell. We have not considered special value in this assessment. We have estimated the fair market value of a CPF unit utilising the net assets on a going concern basis methodology. In addition, we have compared asset based multiples implied by our net asset valuation to those of comparable entities (Section 7.3) to provide further evidence of their fair market value of a unit in CPF. 7.2 Net assets on a going concern basis We have assessed the fair market value of the net assets of CPF on a going concern basis by aggregating the fair market value of its assets and liabilities. Accordingly our assessment does not reflect any costs that would be incurred if the assets were disposed of in order to realise their value.
7.2.1 Fair market value of the net assets of CPF In order to estimate the fair market value of CPF’s net assets we have considered the audited balance sheet as at 30 June 2012 and considered any adjustments required to reflect the difference between the fair market value and the book value of those net assets. We have estimated the current fair market value of CPF’s net assets to be in the range of $24.3 million to $27.7 million as set out in the table below.
Table 25: Summary of the estimated fair market value of CPF’s net assets
Low High Section ($’000) ($’000)
Book value of net assets as at 30 June 2012 4.8 26,827 26,827
Fair market value adjustments Expected cash flows up until implementation date 7.2.1.2 1,013 1,013 Movement in fair market value of financial instruments 7.2.1.3 237 237 Transaction costs 7.2.1.4 (397) (397) Management fees 7.2.1.5 (3,375) - Fair market value of CPF’s net assets 24,305 27,680
Source: Deloitte Corporate Finance analysis CPF’s financial statements are prepared on the basis of fair value measurement of assets and liabilities, except where otherwise stated. Therefore we have assessed CPF’s net assets as at 30 June 2012 as having a fair market value equal to book value. Our consideration of the adjustments requirements to CPF’s net assets as at 30 June 2012 is set out below.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 135 7.2.1.1 The Properties The main component of CPF’s net assets as at 30 June 2012 is its investment portfolio comprising five direct property investments. The ungeared book value of these investments as at 30 June 2012 was $168.4 million as summarised in the table below.
Table 26: Summary of the Properties as at 30 June 2012
Carrying value Property ($’ millions) Capitalisation rate Hurstville, NSW 34.50 9.50% Prospect, NSW 38.50 10.75% Woden, ACT 73.00 9.50% Smithfield, NSW 19.70 10.25% Edinburgh Park, SA 2.70 n/a1 Total 168.40 9.88%2
Source: CPF
Notes: 1. Edinburgh Park was valued using an alternative method to capitalisation approach 2. Total capitalisation rate is determined as a WACR of those properties valued using a capitalisation of earnings methodology
In line with CPF’s internal valuation policy, CPF undertakes independent valuations at intervals of not more than two years. The carrying value of the Properties as at 30 June 2012 was based on a combination of independent appraisals and management estimates of the fair value of the Properties based on the yield and leasing expectations at that time. All of the Properties were independently valued during the 12 months to 30 June 2012 which resulted in a small value increase of 0.20% over the valuations recorded as at 30 June 2011. We have undertaken an analysis of the valuations for the Properties as at their most recent valuation dates. Based on our review, we have concluded that: the external property valuers are independent from CPF and Cromwell, based upon statements included in the valuation reports, and that there were no restrictions on their scope the reports were prepared by professionals who have sufficient qualifications and competence to provide an informed opinion of the fair market value of assets of this nature the valuation methods used in the property valuations are not inappropriate and appear to have been correctly applied to estimate the fair market values of the assets the assumptions and valuation metrics used do not appear unreasonable or inappropriate the primary tenant of the Smithfield property recently failed and has vacated the building. The property is currently substantially vacant. Negotiations are currently underway with a replacement tenant, but there is no certainty a lease agreement will be concluded and a new tenant would not begin paying rent until at least April 2013. The valuation of this property reflects the current vacancy and assumes the property is re-let from April 2013, resulting in a reduction in value of approximately 13.40% since 31 December 2011 nothing has come to our attention that would cause us to make any adjustments for any valuation movements since 30 June 2012. However, we note that any further movements in capitalisation rates may result in an increase or decrease in the value of the Properties in the future. We have prepared a sensitivity analysis of the impact of increasing or decreasing the capitalisation rates incorporated in the 30 June 2012 valuations on our assessed value of CPF in Section 7.2.3.
7.2.1.2 Expected cash flows The net assets of CPF as at 30 June 2012 do not include the cash flows expected to be earned until the implementation date being 28 September 2012. We have therefore included $1.0 million representing the expected net cash earnings to be generated by CPF from 30 June 2012 to the implementation date. However, we note distributions to CPF Unitholders are currently suspended and not expected to recommence until CPF’s LVR is reduced and the majority of the remaining vacancy is leased and the associated costs paid.
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136 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 7.2.1.3 Derivative instruments CPF uses interest rate swaps to hedge against unfavourable movements in interest rates. We have adjusted the net asset position for the favourable movement in the net fair market value of these instruments since 30 June 2012 of approximately $237,000.
7.2.1.4 Transaction costs Regardless of the outcome of the Proposed Transaction, CPF is likely to incur transaction costs in the region of $397,000 including legal fees, other advisors fees, costs relating to the preparation of the Explanatory Memorandum and meeting costs. These expenses will be paid from CPF’s cash reserves, and are to be incurred prior to the implementation of the Proposed Transaction and are excluded from the cash flows up until implementation.
7.2.1.5 Management fees Whilst property management fees are included in the property cash flows used by the CPF Directors and independent valuers in their valuations of the Properties, responsible entity and advisor fees have not been included. Accordingly, those fees represent a potential future cash outflow which is not recognised in the financial position of CPF as at 30 June 2012. Such fees would be payable as long as CPF and its investments are externally managed by CPF RE (or another responsible entity). We have considered whether there should be an adjustment to our valuation of CPF to reflect the potential leakage of value associated with paying ongoing contracted management fees. In August 2009, the CPF RE ceased charging management fees, following the cessation of distribution payments to CPF Unitholders. Following the resumption of distribution payments in September 2010, the CPF RE reinstated discounted management fees, charging 0.1375% pa of the total assets of CPF in contrast with the rate of 0.55% pa of the total assets to which it was entitled, according to the CPF constitution. Management and administration costs for CPF totalled $657,000 in FY2011, and $675,000 in FY2012. In accordance with the CPF constitution, the managers of the Fund are entitled to fees associated with asset management, acquisitions of real property or entities holding real property assets, service fees on applications and redemptions for units in CPF, performance fees over a suitable benchmark, and fee upon sale of a controlled real property asset or entity holding real property assets. There is an argument that such costs would not be factored in by a buyer in assessing the fair market value of a property holding company since: investment property management is a highly scalable business model where costs tend to be relatively fixed. A third party buyer considering purchasing CPF would likely be able to achieve economies of scale in integrating the Fund and managing the property portfolio and therefore would be likely to factor in only a portion of these costs when assessing the purchase price at which to acquire CPF these arrangements are often able to be terminated through an ordinary resolution of unitholders which may result in the manager not receiving any compensation for these rights these costs are incurred for the purpose of improving the performance of a fund either by sourcing new investment opportunities or by optimising the existing portfolio thereby increasing the return of the existing portfolio. Accordingly, it can be argued that the ongoing costs associated with such services should produce a return equal to or higher than the cost of providing those services a potential acquirer of CPF may not see value in continuing with the existing management agreements due to the synergies they expect from assuming the role of the investment manager. On the other hand, in order to remove the responsible entity and asset manager an acquirer may be required to compensate the manager for terminating these management contracts which may include a payment for ensuring a transfer of knowledge from the existing management team to the new management team to minimise disruption for the buyer during implementation. Such compensation is likely to make reference to the net present value of the profit stream associated with the management of the fund.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 137 Since our valuation of CPF assumes the Properties are retained (rather than liquidated) we consider that it is appropriate to allow for some ongoing management fees and administration expenses for the Fund. In FY2012, CPF incurred approximately $675,000 of management and administration costs which are expected to be ongoing in nature. Assuming up to 50% of these costs would continue to be incurred by a potential buyer and a pre-tax capitalisation multiple of 10 times (having regard to the WACR of the Properties of 9.88% and a growth rate of 2.5% consistent with the midpoint of the target for the consumer price index applied by the Reserve Bank of Australia) results in a present value for ongoing management and administration costs applicable to a potential buyer of up to $3.4 million. Based on the above considerations, we have adjusted the net asset position of CPF for future management fees and ongoing administration costs of between nil and $3.4 million.
7.2.1.6 Other considerations
Intangible assets We are not aware of any intangible assets which are not otherwise identified in the accounts of CPF which should be attributed a fair market value.
7.2.2 Conclusion: valuation of a CPF unit We have assessed the fair market value of a unit in CPF (on a control basis) under the net assets on a going concern basis method to be in the range of 14.21 cents per unit to 16.19 cents per unit as set out in the table below.
Table 27: Fair market value of a unit in CPF
Low High Section ($’000) ($’000)
Fair market value of CPF’s net assets 7.2.1 24,305 27,680
Number of CPF units 4.6 171,000,702 171,000,702
Fair market value per unit (cents/unit) 14.21 16.19
Source: Deloitte Corporate Finance analysis
7.2.3 Sensitivity of the value of a CPF unit Whether the valuations of the Properties fall or rise in the future will be a major driver of the fair market value of CPF. Short term prospects in most sub-sectors of the property market remain constrained and as a consequence there is an expectation that property valuations may continue to hold constant or even decline in certain regions. Given the high level of debt within CPF, our valuation is sensitive to relatively small movements in the underlying value of the Properties. Our estimate of the impact of movements in the property valuation capitalisation rate and underlying valuations of the Properties on the fair market value of a CPF unit is set out in the table and graph below.
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138 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Table 28: Valuation of a unit in CPF – sensitivity to movements in property valuation capitalisation rate Movement in property valuation Percentage movement in the value of a capitalisation rate Cents per unit1 CPF unit -2.00% (1.97) (113.0%) -1.50% 1.74 (88.5%) -1.00% 5.81 (61.8%) -0.50% 10.27 (32.4%) 0.00% 15.20 - 0.50% 20.67 36.0% 1.00% 26.78 76.2% 1.50% 33.65 121.4% 2.00% 41.42 172.5%
Source: Deloitte Corporate Finance analysis Note:
1. Based on the mid-point of our assessed value range of a CPF unit
Figure 11: Valuation of a unit in CPF – sensitivity to movements in value of underlying real property values
50.00
Change in value of a CPF unit given a 40.00 50 basis point change in capitalisation rate on the valuation of the Properties 41.42
33.65
30.00
26.78 Assessed fair market value (mid-point)
20.00 20.67
15.20
10.27 Estimated fair marketvalue (cents per unit) 10.00
5.81
1.74 - (17%) (1.97) (14%) (9%) (5%) 0% 6% 12% 19% 26%
(10.00)
Percentage change in the value of the Properties as at 30 June 2012
Source: Deloitte Corporate Finance analysis Broadly speaking, a +/- 0.5% movement in the underlying capitalisation rate of the Properties (assuming no movement in the value of the Edinburgh Park industrial land held by CPF which has not been valued utilising a capitalisation approach) would have a (5.0%)/+5.5% impact on the value of the Properties which equates to an impact of approximately (32%)/+36% on the value of a CPF unit, after taking into account the impact of the existing leverage of the Fund. We note that a 0.5% downward movement in the underlying capitalisation rate of the Properties (with no corresponding change in the value of Cromwell Securities) would result in our assessment of the Proposed Transaction being not fair to CPF Unitholders.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 139 7.3 Asset based multiples The most significant factor impacting our estimate of the fair market value of a CPF unit on a net asset basis is the value of the underlying Properties. Due to the sensitivity of our valuation of a CPF unit to the valuation of the Properties, we have also considered market evidence derived from our analysis of asset-based multiples (tangible assets/EBIT) observed in listed securities involving entities comparable to CPF to provide additional evidence of the fair market value of a unit in CPF. A tangible assets to EBIT multiple reflects the relationship of tangible assets (including the market value of properties held) to earnings. Larger scale, better quality properties will tend to generate higher multiples in that their earnings will be more enduring and less volatile. In contrast, smaller scale, sub-prime properties will tend to generate lower multiples in that their earnings will be less enduring and more volatile. Due to the financial difficulties faced by CPF and other entities operating within the A-REIT sector, and having regard to our interpretation of ASIC Regulatory Guide 111, we do not consider cross-checks such as implied earnings multiples based on enterprise value/EBIT, distribution yields or price/adjusted funds from operations provide meaningful benchmarks against which to cross-check our valuation of CPF and therefore are not capable of being applied in this instance.
7.3.1 Tangible assets/EBIT multiples We have identified a number of listed property funds with characteristics that are broadly comparable to those of CPF. The current and forecast multiples implied by our valuation of CPF compared to the multiples of ASX-listed entities we consider to be comparable to CPF are set out below.
Table 29: Analysis of tangible assets/ EBIT multiples from listed comparable entities
Tangible assets/ current Tangible assets/ forecast Entity Tangible assets1,2 EBIT (times)3 EBIT (times)4
CPF 171 12.3 12.4
CFS Retail Property Group 8,434 17.7 16.5 Commonwealth Property Office Fund 3,714 17.2 15.1 Charter Hall Retail REIT 1,945 15.8 14.1 Growthpoint Properties Australia 1,607 17.3 12.5 Brookfield Prime Property Fund 880 14.6 13.7 Challenger Diversified Property Group 843 19.2 n/a Trinity Group 140 26.4 n/a
Overall average 18.3 14.4 Overall median 17.3 14.1
Source: Deloitte Corporate Finance analysis, Capital IQ, entity annual reports, broker reports Notes: 1. Tangible assets as at 24 August 2012 expressed in Australian dollars 2. Trinity Group has not yet released its 30 June 2012 results as at 24 August 2012 3. Current multiples are calculated as tangible assets /last 12 months current EBIT. EBIT estimates represent adjusted EBIT which excludes investment property revaluations, unrealised gains on financial instruments and other non-cash adjustments 4. Forecast multiples are calculated as tangible assets/forecast FY2013 EBIT 5. Refer to Appendix B for a description of the above comparable entities
We make the following comments in relation to the tangible assets/EBIT multiples analysis conducted: while Growthpoint Properties Australia, Challenger Diversified Property Group and Trinity Group are stapled securities in contrast to the standalone unit trust structure of CPF, each entity has a diversified property portfolio with no funds management or property development operations
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140 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting with reference to the underlying property profile of each of the comparable entities, we have selected the above comparable A-REITs due to their sector specific exposures to both the commercial and retail sectors. We were unable to identify any comparable entities with a similar mix of commercial, retail and industrial assets to CPF whilst the above entities are comparable to CPF in terms of real estate sectors, there are varying degrees of quality within the entities portfolio. For example, CFS Retail Property Trust 1 holds a prime grade portfolio, in contrast to Trinity Group which holds primarily subprime properties although CPF holds a diversified property portfolio, the majority (64% by carrying value) is commercial property Trinity Group holds a portfolio of six properties across QLD (three) and VIC (three). Having recently divested its property development and funds management activities during FY2011, we consider Trinity Group the most comparable to CPF Brookfield Prime Property Fund also holds a similar investment property portfolio to CPF with six commercial properties across Australia in Sydney (three), Melbourne (two) and Perth (one) the average current tangible assets/EBIT multiple for the comparable A-REITs is 18.3 times with a range of 14.6 times to 26.4 times, and an overall median of 17.3 times the average forecast tangible assets/EBIT multiple of comparable A-REITs is 14.4 times with a median of 14.1 times the current and forecast tangible assets/EBIT multiple implied by the tangible asset balance of CPF unit is 12.3 times and 12.4 times, respectively, which is below the lower end of the range of tangible assets/EBIT multiples identified in our analysis of the comparable entities. However, given the differences in the property portfolios of the comparable entities and that of CPF especially regarding the small scale and subprime classification of the Properties, we do not consider this to be inconsistent.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 141 8 Valuation of Cromwell 8.1 Introduction We have estimated the fair market value of a Cromwell Security on a minority interest basis to be in the range of 72 cents to 75 cents per security. We have estimated the fair market value of a Cromwell Security (on a minority basis) using the analysis of recent trading of prices for Cromwell Securities. This valuation has been performed on a minority interest basis since if the Proposed Transaction proceeds, CPF Unitholders will own approximately 2.7% of the outstanding capital of Cromwell. To provide additional evidence of the fair market value of the Cromwell Securities, we have cross-checked our valuation of a Cromwell Security using the capitalisation of maintainable earnings approach. 8.2 Analysis of recent security trading in Cromwell
8.2.1 Evaluation In order to estimate the fair market value of the Cromwell Securities which may be received as consideration pursuant to the Proposed Transaction, we have relied upon recent trading prices for the Cromwell Securities as our primary methodology. We have analysed the value of the Cromwell Securities on a minority basis since CPF Unitholders will receive a minority or portfolio interest in Cromwell if the Proposed Transaction proceeds and the security trading price of Cromwell represents a reasonable estimate of a minority value. Further, any market re-rating or synergies arising as a result of the Proposed Transaction are likely to have an immaterial impact on the security price of Cromwell due to the relative scale of Cromwell’s operations and asset base compared to those of CPF. The decision to hold or sell Cromwell securities is an investment decision which holders of CPF units will have to make if the Proposed Transaction is approved. This is a separate decision to the decision as to whether to vote in favour of the Proposed Transaction. This report has not been prepared to assist CPF Unitholders (or holders of Cromwell securities) in deciding whether to hold or sell securities in Cromwell if the Proposed Transaction proceeds.
8.2.2 Approach The market can be expected to provide an objective assessment of the fair market value of a listed entity, where the market is well informed and liquid. Market prices incorporate the influence of all publicly known information relevant to the value of an entity’s shares. We consider recent trading in Cromwell securities to be a reasonable benchmark for the estimated fair market value of a Cromwell security to be received by CPF Unitholders, on minority interest basis, for the following reasons: Cromwell issues periodic reports regarding Cromwell’s financial performance, therefore we consider the market is sufficiently well informed to enable the share price of Cromwell to be an appropriate measure of its fair market value in the six month period prior to the announcement of the Proposed Transaction, approximately 3.0 million Cromwell securities were traded on average on a weekly basis. This equates to an average trading volume of approximately 0.3% of Cromwell’s issued securities per week, or 6.6% for the entire six month period. Based on this, the Cromwell Securities are considered to have lower liquidity as compared to listed peers whilst Cromwell Securities have lower liquidity compared to their listed peers, we still consider there to be sufficient liquidity to support the use of recent security trading as a primary valuation methodology. Further supporting this, there is a strong retail and institutional holder base as well as coverage from several research analysts; sufficient that recent security trading is an adequate benchmark for the current value of Cromwell Securities there has not been significant volatility in the recent trading of Cromwell Securities that would limit the applicability of this approach. Accordingly, we consider it is reasonable to assume that the security price of Cromwell represents a reasonable market assessment of the value of a Cromwell Security on a minority basis.
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142 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 8.2.3 Recent trading From 1 August 2011 to 7 August 2012 Cromwell Securities traded in a range of 61.00 cents to 73.50 cents per security with a VWAP of 68.68 cents. Since the announcement of the Proposed Transaction, Cromwell Securities have traded within a range of 72.00 cents to 75.00 cents per security. The following table sets out the market trading in Cromwell Securities prior to and since the announcement of the Proposed Transaction:
Table 30: Summary – analysis of recent trading in Cromwell Securities
Value Cents per security
Share prices after the announcement of the Proposed Transaction (on 8 August 2012) Share price trading range (up to 24 August 2012) 72.00-75.00 VWAP (up to 24 August 2012) 73.65 Most recent trading price (as at 24 August 2012) 74.00
VWAP prior to the announcement of the Proposed Transaction (on 8 August 2012) 1 day prior to announcement 72.36 1 week prior to announcement 72.11 1 month prior to announcement 70.16 3 months prior to announcement 70.02
Source: Thomson Reuters and Deloitte Corporate Finance analysis Based on the security market trading activity in Cromwell since the announcement of the Proposed Transaction, we have assessed the value of a Cromwell Security to be in the range from 72 cents to 75 cents per security. We have compared the daily VWAP of a Cromwell Security to our selected value of a security in Cromwell of 72 cents to 75 cents per security in the figure below.
Figure 12: Comparison of security trading 76.00
74.00
72.00
70.00
68.00
66.00
Daily VWAP Daily VWAP (cents per security) 64.00
62.00
60.00
Daily VWAP Deloitte assessed value
Source: Thomson Reuters and Deloitte Corporate Finance analysis
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 143 Our assessed range of values for a Cromwell Security implies a premium in the range of 7.0% to 11.4% over the current Cromwell NTA per security as at 30 June 2012 of 67.32 cents. Over the last 12 months the Cromwell Securities have traded at a premium/(discount) to NTA in the range from (18.7)% to 14.8% as set out in the figure below:
Figure 13: Cromwell premium (discount) to NTA per security 30%
20%
10%
0%
Premium Premium (discount) to NTA -10%
-20%
-30%
Premium (discount) to NTA Average last 12 months
Source: Thomson Reuters and Deloitte Corporate Finance analysis Cromwell’s security price performance above its underlying NTA implies the market is attributing additional value to Cromwell which could relate to: the implicit value of Cromwell’s funds management and property management business which is not reflected in Cromwell’s NTA the financial prospects of Cromwell. Cromwell has forecast EBIT growth of 28% in comparison to the average of approximately 13% for the entities with comparable operations positive market sentiment regarding the valuations of the Cromwell property portfolio consistent distribution payout ratios to continue into the future.
8.2.4 Assessed value Based on the above analysis, we have estimated the current fair market value of a Cromwell Security on a minority interest basis to be in the range of 72 cents to 75 cents per security.
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144 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 8.3 Valuation cross check
8.3.1 Earnings multiples To assess the reasonableness of our estimate of the fair market value of a Cromwell Security we have compared the EBIT multiples implied by our estimate of the fair market value of Cromwell to trading EBIT multiples of entities comparable to Cromwell. An EBIT multiple reflects the relationship of the enterprise value of an entity (being the market capitalisation plus net debt) to earnings. The EBIT multiples implied by our assessed valuation range of Cromwell on a minority interest basis are set out below.
Table 31: EBIT multiples implied by our valuation of Cromwell
Low High
Fair market value of an Cromwell Security (cents per security) 72.00 75.00 Number of Cromwell Securities post the Proposed Transaction (‘millions) 1.211 1.211 Equity value implied by our valuation of Cromwell (on a minority basis) ($’millions) 871.7 908.0
Net debt ($’millions) 905.0 905.0 Enterprise value implied by our valuation of Cromwell (on a minority basis) ($’millions) 1,776.7 1,813.0
FY12 implied EBIT multiple (current) (times) 12.5 12.8 FY13 implied EBIT multiple (forecast) (times) 11.3 11.6
Source: Deloitte Corporate Finance analysis, Capital IQ, entity annual reports, broker reports
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 145 The current and forecast multiples implied by our valuation of Cromwell may be compared to the EBIT multiples of ASX-listed entities comparable to Cromwell as set out below.
Table 32: Analysis of EBIT multiples from listed comparable entities
Enterprise Current Forecast value EBIT EBIT Current EBIT Forecast EBIT Entity (million)1 Gearing2 growth growth (times)3 4 (times)4
Cromwell 1,795 52% 7% 28% 12.7x 11.4x
Stockland Corporation Limited 10,369 24% -35% 13% 16.8x 14.8x GPT Group 8,156 13% 5% 55% 21.9x 14.2x Goodman Group 8,265 11% 8% 141% 34.1x 14.8x Dexus Property Group 6,600 44% 2% 4% 14.8x 15.1x Mirvac Group 6,404 39% -11% 2% 14.5x 14.0x Australand Holdings Limited 3,114 57% 6% 39% 16.2x 12.6x Investa Office Fund 2,061 26% 1% -14% 11.2x 13.4x Abacus Property Group 1,681 29% 10% -9% 15.5x 18.4x Growthpoint Properties Australia 1,400 29% 7% 40% 15.4x 11.0x Charter Hall Group 823 28% -50% 173% 33.2x 12.6x Challenger Diversified Property 752 29% 10% 7% 12.5x 11.8x Group Aspen Group 382 23% 11% -237% 20.3x n/a Trinity Group 118 22% 10% -100% 22.2x n/a Trafalgar Corporate Group Limited 66 38% -28% -100% 8.1x n/a
Overall average 29% -4% 1% 18.3x 13.9x Overall median 28% 6% 5% 15.9x 14.0x
Source: Deloitte Corporate Finance analysis, Capital IQ, entity annual reports, broker reports Notes: 1. Enterprise value is calculated as market capitalisation (at 24 August 2012) plus net debt and expressed in Australian dollars 2. Gearing is calculated as total debt / total assets 3. Current and forecast EBIT multiples are calculated as (market capitalisation plus net debt) /last 12 months current EBIT and (market capitalisation plus net debt) /FY2012 forecast EBIT. EBIT estimates represent adjusted EBIT which excludes investment property revaluations, unrealised gains on financial instruments and other non-cash adjustments 4. Refer to Appendix C for a description of the above comparable entities 5. Based on the mid-point of our implied enterprise value for Cromwell We make the following comments in relation to the EBIT multiples analysis conducted: the average current EBIT multiple for comparable A-REITs is 18.3 times with a range of 8.1 times to 34.1 times. The average forecast EBIT multiple for comparable A-REITs is 13.9 times with a range of 11.0 times to 18.4 times with reference to enterprise value, underlying property profile and gearing, we consider the entities most comparable to Cromwell are Abacus Property Group, Growthpoint Properties Australia and Challenger Diversified Property Group Abacus Property Group holds a similar investment property portfolio to Cromwell including Australian commercial, industrial and retail real estate. It also operates a similar property funds management business. Abacus Property Group has a current EBIT multiple of 15.5 times and a forecast multiple of 18.4 times, with a forecast decline in EBIT of 9% Growthpoint Properties Australia holds a similar investment property portfolio of Australian commercial and industrial real estate, although it holds no retail assets. Similar to Cromwell, the investment property portfolio is internally managed, although the fund differs in that it does not operate a funds management business. Growthpoint
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146 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Properties Australia has a current EBIT multiple of 15.4 times and a forecast multiple of 11.0 times, with a forecast increase in EBIT of 40% Challenger Diversified Property Group has similar Australian property exposure to the commercial, industrial and retail sectors to Cromwell. The fund differs from Cromwell in that it does not operate a funds management business and has some minor exposure to foreign property assets. Challenger Diversified Property Group has a current EBIT multiple of 12.5 times and a forecast multiple of 11.8 times, with a forecast increase in EBIT of 7% Cromwell has stronger current and forecast EBIT growth (7% and 28%, respectively) in comparison to the average of the comparable entities noted above ((4%) and 1%, respectively) the current and forecast EBIT multiple implied by our assessed midpoint value of a Cromwell Security is 12.7 times and 11.4 times, respectively, which is broadly in line with the EBIT multiples identified in our analysis of comparable entities. We are of the opinion that the multiples analysis above is broadly supportive of our assessment of the fair market value, on a minority basis, of a Cromwell Security.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 147 Appendix A: Glossary
Reference Definition
A-REIT Index Standard and Poor’s/Australian Securities Exchange 200 A-REIT index A-REITs Australian Real Estate Investment Trusts ACT Australian Capital Territory APESB Accounting Professional and Ethical Standards Board Limited ASIC Regulatory Guide 111 ASIC Regulatory Guide 111: Content of expert reports, issued by ASIC in March 2011 AUASB Auditing and Assurance Standards Board ASX Australian Securities Exchange Bank Loan Bank loan currently drawn to $112 million BBSY Bank Bill Swap Bid Rate CAGR Cumulative annual growth rate CBD Central business district CCL Cromwell Corporation Limited CDPT Cromwell Diversified Property Trust Corporations Act Corporations Act 2001 (Cth) Cromwell Cromwell Property Group Cromwell Securities One Cromwell Corporation Limited share and one Cromwell Diversified Property Trust unit CPF or the Fund Cromwell Property Fund CPF Directors, the The independent directors of the CPF RE CPF RE Cromwell Property Securities Limited , the responsible entity for Cromwell Property Fund CPF Unitholders A holder of CPF units CPN Cromwell Paclib Nominee CREP Cromwell Real Estate Partners Deloitte Corporate Finance Deloitte Corporate Finance Pty Limited EBIT Earnings before interest and tax Explanatory Memorandum Explanatory memorandum to the notice of meeting FSG Financial Services Guide FOS Financial Ombudsman Service FUM Funds under management FY Financial year ended 30 June LVR Loan to value ratio calculated as the Bank Loan to the value of the Properties NAB National Australia Bank NSW New South Wales n/a Not available NAB National Australia Bank NTA Net tangible assets PDS Product Disclosure Statement Properties, the The investment properties held by Cromwell Property Fund (refer Section 4.3) Proposed Transaction, the The proposed transaction between Cromwell Property Fund and Cromwell Property Group (refer Section 1) PRP Performance Rights Plan S&P Standard and Poor’s
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148 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Reference Definition
SA South Australia TGA The Therapeutic Goods Administration US United States VWAP Volume weighted average price WACR Weighted average valuation capitalisation rate WALE Weighted average lease expiry
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 149 Appendix B: Comparable entities to CPF
The following provides a description of the entities with comparable operations to CPF (listed by market capitalisation):
CFS Retail Property Trust 1 CFS Retail Property Trust 1 is an equity real estate investment trust launched and managed by Commonwealth Managed Investments Limited and co-managed by Colonial First State Property Limited. It invests in the real estate markets of Australia, primarily in shopping centres.
Commonwealth Property Office Commonwealth Property Office Fund is an A-REIT mutual fund launched by Commonwealth Managed Investments Limited and managed by Colonial First State Property Limited. It invests in prime quality office buildings located in central business district and major suburban markets of Australia. Charter Hall Retail REIT Charter Hall Retail REIT is a real estate investment trust launched and managed by Charter Hall Retail Management Limited. The firm engages in investment in properties in Australia, New Zealand, and the US. The firms portfolio consists of well located grocery anchored neighbourhood and sub-regional shopping centres together with select household retail centres.
Growthpoint Properties Australia The fund invests in the real estate markets of Australia. It primarily invests in income producing industrial property including traditional assets in the retail, office and industrial sectors, as well as a range of non-traditional property assets, such as childcare centres, medical centres and hospitals.
Brookfield Prime Property Fund Brookfield Prime Property Fund is a unit trust which owns a high quality portfolio of CBD office assets with six commercial properties across Australia in Sydney (three), Melbourne (two) and Perth (one).
Challenger Diversified Property Group Challenger Diversified Property Group invests in office, retail and industrial properties in Australia and France. It also engages in property development activities and invests in a car park operating business.
Trinity Group Trinity Group engages in the investment in and management of commercial, retail, industrial and residential properties in Australia. It was previously involved in funds management, including property and project management and property development activities which have been recently divested.
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150 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Appendix C: Comparable entities to Cromwell
The following provides a description of the entities with comparable operations to Cromwell (listed by market capitalisation):
Stockland Corporation Limited Stockland Corporation Limited engages in the development and management of real estate projects in Australia, the United Kingdom and New Zealand. It invests in retail, office, industrial and office park properties, as well as residential properties and retirement living facilities. The entity also offers property trust management and property management services.
GPT Group GPT Group operates as a diversified real estate investment property trust. It invests in retail, commercial, hotel, industrial and office park properties. The entity also engages in the development of retail, commercial, industrial and office park properties; residential property development; property trust management; property management; and hotel management. GPT Group operates in Australia, Europe, and the US.
Goodman Group Goodman Group engages in the ownership, development and management of industrial properties and business space in Australia, the Asia-Pacific region, Europe and the United Kingdom. Its property portfolio includes business parks, office parks, industrial estates, and warehouse and distribution centres. The entity has 588 properties under management.
Dexus Property Group Dexus Property Group owns, manages and develops office, industrial, and retail properties in Australia, New Zealand, the US, France, Germany and Canada. It also develops and manages office, industrial, and retail properties on behalf of third party investors. Its property portfolio consists of approximately 260 office, industrial, and retail properties.
Mirvac Group Mirvac Group engages in real estate investment and development, funds management and hotel management primarily in Australia. It involves the investment and asset management of a range of properties, including commercial offices, retail centres, industrial properties, hotels, and carparks. The entity also engages in the construction and property development of residential, commercial, industrial and retail development projects.
Australand Holdings Limited Australand Holdings Limited engages in the development of land, housing projects, apartments, as well as commercial, industrial and retail properties primarily in Australia. It also invests in income producing commercial and industrial properties. In addition, the entity engages in property trust management and property management activities. As of 31 December 2011, it had 70 investment properties, including 3 properties under development.
Investa Office Fund Investa Office Fund operates as a property trust that invests in office properties, primarily leased on a long term basis, to investment grade and blue chip tenants. As of 30 June 2008, the entity owned a portfolio of 26 office properties located in Australia, Europe, and the US, as well as had interests in 88 office properties situated in the Netherlands.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 151 Abacus Property Group Abacus Property Group engages in the management and investment of property based assets in Australia. The entity is involved in property investment, funds management, property finance, and projects and investments activities. The entity holds a diversified investment portfolio of retail, commercial and industrial properties. In addition, Abacus Property Group develops, originates, and manages off balance sheet funds, engages in mortgage lending and related property financing solutions and invests in joint venture activities and in securities of other listed and unlisted property trusts.
Growthpoint Properties Australia The fund invests in the real estate markets of Australia. It primarily invests in income producing industrial property including traditional assets in the retail, office and industrial sectors, as well as a range of non-traditional property assets, such as childcare centres, medical centres and hospitals.
Charter Hall Group Charter Hall Group, through its subsidiaries, operates as a property investment, funds management and development management entity in Australia and New Zealand. The property investment business segment has interests in investment properties and unlisted funds. It has a diversified portfolio of properties in various sectors, including commercial, industrial, retail, bulky goods retail and infill residential sectors. The funds management and corporate business segment develops and manages investment and opportunity funds on behalf of institutional and retail investors and manages the assets of the Charter Hall Property Trust.
Challenger Diversified Property Group Challenger Diversified Property Group invests in office, retail and industrial properties in Australia and France. It also engages in property development activities and invests in a car park operating business.
Aspen Group Aspen Group operates as a property investment and management entity in Australia. The entity primarily focuses on acquiring commercial properties, including office, retail and industrial properties. It also offers managed funds, which provide investment opportunities across various property sectors, including tourist parks, residential land subdivisions, CBD office developments, private hospital developments, and retirement and accommodation villages.
Trinity Group Trinity Group engages in the investment in and management of commercial, retail, industrial and residential properties in Australia. It was previously involved in funds management, including property and project management and property development activities which have been recently divested.
Trafalgar Corporate Group Limited Trafalgar Corporate Group Limited operates as a property investment, development and funds management entity in Australia. Its investment portfolio primarily comprises office and industrial properties which are leased to investment grade corporates or Commonwealth Government agencies on a long term basis. The entity also owns, controls, or has a joint venture interest in a portfolio of five residential development assets and one commercial development asset.
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152 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Appendix D: Sources of information
In preparing this report we have had access to the following principal sources of information: draft copies of the Explanatory Memorandum audited financial statements for Cromwell for FY2010, FY2011 and FY2012 audited financial statements for CPF for FY2010, FY2011 and FY2012 independent valuations of the Properties held by CPF annual and quarterly reports for CPF for FY2010, FY2011 and FY2012 annual and interim financial reports for Cromwell FY2010, FY2011 and FY2012 internal management documents for CPF CPF constitution document publicly available information on comparable entities and market transactions published by Thomson research, Thomson Reuters, Mergermarket and Capital IQ various industry and economic websites and publications IBIS entity and industry reports In addition, we have had discussions and correspondence with certain directors and executives, including Daryl Wilson, Director, Finance and Funds Management; Nicole Riethmuller, General Counsel, Company Secretary; and Greg Lander, Manager, Transactions; in relation to the above information and to current operations and prospects of CPF.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 153 Appendix E: Qualifications, declarations and consents
The report has been prepared at the request of the CPF Directors and is to be included in the Explanatory Memorandum to be given to CPF Unitholders to assist them in their assessment of the Proposed Transaction. Accordingly, it has been prepared only for the benefit of the CPF Directors and those persons entitled to receive the Explanatory Memorandum in their assessment of the Proposed Transaction outlined in the report and should not be used for any other purpose. Neither Deloitte Corporate Finance, Deloitte Touche Tohmatsu, nor any member or employee thereof, undertakes responsibility to any person, other than the CPF Unitholders and the CPF Directors, in respect of this report, including any errors or omissions however caused. Further, recipients of this report should be aware that it has been prepared without taking account of their individual objectives, financial situation or needs. Accordingly, each recipient should consider these factors before voting on the Proposed Transaction. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the APESB. The report represents solely the expression by Deloitte Corporate Finance of its opinion as to whether the Proposed Transaction is in the fair and reasonable, and therefore in the best interests of CPF Unitholders as a whole. Deloitte Corporate Finance consents to this report being included in the Explanatory Memorandum in the form and context in which it is to be included in the Explanatory Memorandum. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Deloitte Corporate Finance has relied upon the completeness of the information provided CPF and its officers, employees, agents or advisors which Deloitte Corporate Finance believes, on reasonable grounds, to be reliable, complete and not misleading. Deloitte Corporate Finance does not imply, nor should it be construed, that it has carried out any form of audit or verification on the information and records supplied to us. Drafts of our report were issued to CPF management for confirmation of factual accuracy. In recognition that Deloitte Corporate Finance may rely on information provided by CPF and its officers, employees, agents or advisors, CPF has agreed that it will not make any claim against Deloitte Corporate Finance to recover any loss or damage which CPF may suffer as a result of that reliance and that it will indemnify Deloitte Corporate Finance against any liability that arises out of either Deloitte Corporate Finance’s reliance on the information provided by CPF and its officers, employees, agents or advisors or the failure by CPF and its officers, employees, agents or advisors to provide Deloitte Corporate Finance with any material information relating to the Proposed Transaction. Deloitte Corporate Finance holds the appropriate Australian Financial Services licence to issue this report and is owned by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte Corporate Finance principally involved in the preparation of this report were Robin Polson, Director, B.Comm, G. Dip. App Fin, FINSIA; Rachel Foley-Lewis, Director, B.Comm., CA, F.Fin; Renee Daus, Associate Director, MAF, B.Comm, CA and Scott Elliott, Client Manager, M. Com. App. Fin., SA Fin. Robin, Rachel and Renee each have many years’ experience in the provision of corporate financial advice, including specific advice on valuations, mergers and acquisitions, as well as the preparation of expert reports.
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154 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Consent to being named in disclosure document Deloitte Corporate Finance Pty Limited (ACN 003 833 127) of 225 George Street, Sydney, NSW, 2000 acknowledges that: Cromwell Property Securities Limited as responsible entity for CPF proposes to issue an Explanatory Memorandum in respect of the Proposed Transaction between Cromwell and the CPF Unitholders the Explanatory Memorandum will be issued in hard copy and be available in electronic format it has previously received a copy of the draft Explanatory Memorandum it is named in the Explanatory Memorandum as the ‘independent expert’ and the Explanatory Memorandum includes its independent expert’s report in Annexure 3 of the Explanatory Memorandum. On the basis that the Explanatory Memorandum is consistent in all material respects with the draft Explanatory Memorandum received, Deloitte Corporate Finance Pty Limited consents to it being named in the Explanatory Memorandum in the form and context in which it is so named, to the inclusion of its independent expert’s report in Annexure 3 of the Explanatory Memorandum and to all references to its independent expert’s report in the form and context in which they are included, whether the Explanatory Memorandum is issued in hard copy or electronic format or both. Deloitte Corporate Finance Pty Limited has not authorised or caused the issue of the Explanatory Memorandum and takes no responsibility for any part of the Explanatory Memorandum, other than any references to its name and the independent expert’s report as included in Annexure 3.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 155
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156 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 4 Fees and Other Costs
Consumer advisory warning The warning below is required by law.
Did you know? To find out more Small differences in both investment performance and If you would like to find out more, or see the impact fees and costs can have a substantial impact on your long of the fees based on your own circumstances, term returns. the Australian Securities and Investments Commission For example, total annual fees and costs of 2% of your (ASIC) website (www.moneysmart.gov.au) has a fund balance rather than 1% could reduce your final managed investment fee calculator to help you check return by up to 20% over a 30 year period (for example, out different fee options. reduce it from $100 000 to $80 000). You should consider whether features such as superior investment performance or the provision of better member services justify higher fees and costs. You may be able to negotiate to pay lower contribution fees and management costs where applicable. Ask the fund or your financial adviser.
1.1. Summary of fees and other costs This Annexure 4 shows fees and other costs that you may be You should read all the information about fees and costs charged. These fees and costs may be deducted from your because it is important to understand their impact on your money, from the returns on your investment or from CDPT’s investment. assets as a whole. All fees and costs are inclusive of GST and net of any Information regarding taxes is set out in the Taxation Report applicable input tax credits and/or reduced input tax credits. (see Annexure 2 on page 77).
Type Of Fee Or Cost Amount How And When Paid Fees when your money moves in or out of the Fund
Establishment fee The fee to open your investment Nil Not applicable
Contribution fee The fee on each amount contributed to your investment Nil Not applicable
Withdrawal fee The fee on each amount you take out of your investment Nil Not applicable
Termination fee The fee to close your investment Nil Not applicable
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 157 Type Of Fee Or Cost Amount How And When Paid Management Costs* The fees and costs for managing your investment Expenses estimated to be 0.10% of Payable when incurred. If expenses are CDPT’s gross asset value (eg $10 out of initially paid by CDPT RE, then CDPT RE every $10,000 of gross asset value). is entitled to be reimbursed from CDPT upon presentation of relevant invoices. Base annual management fee of up to Payable to CDPT RE from CDPT monthly 0.65% pa of CDPT’s gross asset value in arrears. (ie $65 out of every $10,000 of CDPT’s gross asset value). Bonus performance fee of up to 10% of Payable upon the sale of any real the amount by which the internal rate of property asset and paid upon settlement return of a real property asset exceeds of that sale. 11.5%. Acquisition fee of up to 5% of Paid by CDPT upon acquisition the purchase price of real property of any real property asset. assets acquired by CDPT.
Service fees
Investment Switching Fee Nil. Not applicable. The Fee for changing funds
* These costs are based on current financial information and include amounts that CDPT RE can only estimate, including but not limited to expenses and performance fees.
1.2. Additional explanation of fees and costs
1.2.1. Management Costs 1.2.2. Other fees and costs incurred in the normal course Base annual management fee of CDPT’s business The CDPT Constitution allows CDPT RE to charge an ongoing Property management fees annual base management fee of up to 0.65% of CDPT’s CDPT RE has appointed Cromwell Property Services Pty Ltd average gross asset value. However, CDPT RE is currently (“Cromwell Property”) a related company, to manage its real charging a reduced fee of 0.50% of CDPT’s average gross property assets. CDPT RE may retain a property manager asset value and intends to continue to do so. other than Cromwell Property to perform some or all Annual administration costs property management functions. CDPT will incur administration costs such as the ASX Listing In circumstances where property management fees form fees, audit costs, custodial fees, compliance committee part of the outgoings of real property assets, they may be costs, accounting/ tax/ legal advice, bank charges, printing recoverable, in full or in part, from tenants under the terms and stationery costs, postage and a registry fee. CDPT RE of their leases and there will be no net cost to CDPT. estimates these at 0.10% of CDPT’s gross asset value per annum. Cromwell Property (and any other property manager, where applicable) is paid property management fees from CDPT at Acquisition fee commercial market rates. The CDPT Constitution allows CDPT RE or its related entities to charge an acquisition fee of up to 5% of the acquisition Leasing fees price of real property assets acquired by CDPT. However Cromwell Property receives leasing fees if it secures new CDPT RE has not charged a fee for any acquisition since tenants or renews or extends leases with existing tenants December 2006 and does not intend to do so in the future. for any of the real property assets. These fees are charged at commercial market rates, depending on the size of the Bonus performance fee area leased, the term of the lease and the conditions of Upon the sale of any real property asset, CDPT RE is the lease. Where an external agent is retained to introduce entitled to receive a bonus performance fee of up to 10% new tenants, the external agent will be paid by CDPT at of the amount by which the internal rate of return on that commercial market rates. In such cases, Cromwell Property asset exceeds 11.5%. However, CDPT RE has not charged a will limit its fee to the commercial rate for a coordinating performance fee since December 2006 and does not intend agent. to do so in the future.
158 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Project management fees 1.3. Example of annual fees and costs CDPT RE has appointed Cromwell Project and Technical Solutions Pty Ltd (“Cromwell Projects”) to manage CDPT’s This table gives an example of how the Management Costs ongoing property improvement and capital expenditure for CDPT can affect your investment over a one year period. programme. External project managers are also used from You should use this table to compare this product with other time to time. Project management services are charged at managed investment products. commercial market rates. Balance of $50,000 Selling fee with total contributions Cromwell Property may act as the selling agent of CDPT for Example of $5,000 during year¹ a real property asset. Where it or any other related party of CDPT RE is appointed selling agent of a real property asset, Contribution Fees 0% For every $5,000 you put in, you will be charged $0. Cromwell Property is able to charge a selling fee of up to 1% of the sale price upon completion of any such sale. PLUS Management 1.45% pa And, for every $50,000 you have Cromwell Property does not currently charge a fee for these Costs in the Fund you will be charged $725 each year. services and does not intend to do so in the future. Accounting services fees EQUALS Cost of Nil you had an investment of A related party of CDPT RE will keep and maintain CDPT’s the Fund $50,000 at the beginning of financial and accounting records and charges CDPT the year and you put in an additional $5,000 during that year, you accounting services fees on a cost recovery basis for the would be charged fees of: provision of those services. $725 Other service fees CDPT RE or a related party may also provide other services What it costs you will depend on to CDPT or the investors in the future such as development, the fees you negotiate with your registry or administration services. Should that occur, CDPT financial adviser. RE will charge fees for those services at rates which do ¹ The example assumes that the $50,000 is invested for the entire year and not exceed the then current market rates for the services that the $5000 contribution occurs at the end of the first year, so that the provided. management costs are calculated using the $50,000 balance only. This example does not include performance fees or acquisition fees as it is not possible to give 1.2.3. Expenses a true estimate of these fees. In addition to the fees noted above, CDPT RE is entitled 1.4. Changes to fees and expenses under the CDPT constitution to be reimbursed for all expenses and liabilities which it may incur in connection CDPT RE may change the fees and expenses referred with CDPT or in performing its obligations or exercising to above. CDPT RE will provide at least 30 days notice to its powers under the CDPT constitution. These expenses Cromwell Securityholders of any proposed increase in fees include but are not limited to the following: and expenses. • costs, charges and expenses incurred in connection with the acquisition or proposed acquisition of any assets of CDPT; • costs, charges and expenses of maintaining and improving any assets of CDPT; • costs of convening and holding any meeting of investors; • expenses incurred in connection with the keeping and maintaining of accounting and financial records and registers including the register of investors; • costs, charges and expense and disbursements paid or payable to the Custodian; • fees incurred in arranging finance or refinancing debt; and • the fees and expenses of the compliance committee of the CDPT. 1.2.4. Costs of the Merger CDPT RE will incur costs in relation to the Merger (see Section 4.6.2 on page 25) and is entitled to be reimbursed for those costs from CDPT. These are considered to be abnormal costs and are not incurred on an ongoing basis.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 159 Annexure 5 Notice of Meeting
Notice is hereby given by Cromwell Property Securities The Explanatory Memorandum accompanying this Notice Limited ABN 11 079 147 809 AFSL 238052 (“CPSL”) of Meeting forms part of the Notice of Meeting and provides as responsible entity of Cromwell Property Fund information relating to the Resolutions, how CPSL as ARSN 119 080 410 (“the Fund”) that a general meeting responsible entity of CPF will implement the Resolutions, of the Fund will be held on: and its reasons for proposing the Resolutions. In particular, Date: Wedneday, 3 October, 2012 Annexure 6 contains further details about the Meeting and Time: 1pm how to vote. Capitalised terms used in the Resolutions have Venue: The River Room, Stamford Plaza, the meaning given to them in the Explanatory Memorandum. corner Edward & Margaret Streets, Brisbane Resolution 1 is an ordinary resolution and will not be Additional information concerning the Resolutions passed unless more than 50 per cent of the votes cast on is contained in the Explanatory Memorandum which the resolution are cast in favour of the resolution by CPF accompanies and forms part of this Notice of Meeting. Unitholders. Resolution 2 is a special resolution and will not be passed Special Business unless at least 75 per cent of the votes cast on the resolution are cast in favour of the resolution by CPF Unitholders. The business to be considered at the general meeting is as follows: In accordance with section 253E of the Corporations Act, CPSL and its associates will not vote on the Resolutions if 1 Merger Resolution they have an interest in those Resolutions other than as a To consider and, if thought fit, to pass the following member of CPF, except: resolution as an ordinary resolution of the unitholders of • they may vote as proxies if their appointments specify Cromwell Property Fund (“Resolution 1”): the way they are to vote and they vote that way; and “That subject to and conditional on Resolution 2 being • in respect of CPF Units which they hold as a custodian, passed, the Merger be approved and, in particular, that the nominee, trustee, responsible entity or other fiduciary on acquisition by Cromwell Property Securities Limited (ABN behalf of a third party who is not an associate of CPSL or 11 079 147 809) as responsible entity of Cromwell Diversified of CDPT RE. Property Trust (ARSN 102 982 598) of all of the CPF Units it None of Cromwell and their associates will vote at the does not already own pursuant to the Merger be approved for Meeting except: all purposes.” • they may vote as proxies if their appointments specify 2 Constitutional Amendment Resolution the way they are to vote and they vote that way; and To consider and, if thought fit, to pass the following • in respect of CPF Units which they hold as a custodian, resolution as a special resolution of the unitholders of nominee, trustee, responsible entity or other fiduciary on Cromwell Property Fund (“Resolution 2”): behalf of a third party who is not an associate of CPSL or “That subject to and conditional on Resolution 1 being of CDPT RE. passed: By order of the Board of Cromwell Property Securities (a) the constitution of Cromwell Property Fund be amended Limited as responsible entity of the Cromwell Property Fund. with effect on and from the Implementation Date as set out in the Supplemental Deed contained in Annexure 7 of the Explanatory Memorandum accompanying the Notice convening this Meeting; and Nicole Riethmuller Company Secretary (b) Cromwell Property Securities Limited as the respon- 7 September 2012 sible entity of Cromwell Property Fund be authorised to execute and lodge with the Australian Securities and Investments Commission, the Supplemental Deed.”
160 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 6 Meeting Details and How to Vote
1.1. Date and time of the Meeting 1.5. Jointly held CPF Units The Meeting will be held on Wednesday 3 October, 2012 at If CPF Units are jointly held, only one of the joint holders 1pm at The River Room, Stamford Plaza, corner Edward & is entitled to vote. If more than one holder votes in respect Margaret Streets, Brisbane. of jointly held CPF Units, only the votes of CPF Unitholder The business of the Meeting is to consider and, if thought fit, whose name appears first in the Register in respect of the to approve the Merger. relevant CPF Units will be counted. There will be two Resolutions on which CPF Unitholders will be asked to vote at the Meeting. The Resolutions 1.6. Voting majorities required are described in Section 11.2 on page 59 and set out in For the Merger to proceed, the Resolutions must be the Notice of Meeting in Annexure 5 on page 160. approved as follows: • Resolution 1 (to approve the Merger): more than 50 1.2. Quorum percent of the total number of votes cast by (or on behalf The quorum for the Meeting is three (3) CPF Unitholders of) CPF Unitholders at the Meeting who are entitled to present in person or by proxy. CPF RE may adjourn the vote must be voted in favour of the acquisition of CPF Meeting if a quorum is not present within thirty minutes of Units by CDPT RE as part of the Merger; and the scheduled time for the Meeting. • Resolution 2 (amendment of CPF Constitution): at least 75 per cent of the total number of votes cast by (or on behalf of) CPF Unitholders at the Meeting 1.3. Entitlement to vote who are entitled to vote must be voted in favour of the constitutional amendments set out in the Supplemental 1.3.1. CPF Unitholders Deed (see Annexure 7 on page 163). All CPF Unitholders appearing on the Register at 5pm on The Resolutions are interconditional and the Merger will Monday 1 October 2012 are entitled to attend and vote at the only be implemented if both Resolutions are passed by the Meeting (subject to the voting exclusions set out in Section requisite majorities. 8.3 on page 48). Transfers of CPF Units registered after this time will be disregarded in determining entitlements to vote 1.7. Voting exclusions at the Meeting. The voting exclusions are set out in Section 8.3 on page 48. 1.4. Voting by poll 1.8. Voting intentions of the Chairman The vote on each Resolution will be conducted by way of a poll, with the Chairman of the Meeting demanding a poll on CPSL will appoint a person to chair the Meeting. Resolution 1 under the CPF Constitution and Resolution 2 The Chairman intends to vote any undirected proxies in being a poll by virtue of being a special resolution. Each CPF favour of the Resolutions. Unitholder present in person, by attorney or by proxy has, on a poll, one vote for each dollar of the value of the total interest, they have in CPF. If a CPF Unitholder is entitled to 2 or more votes, they do not need to exercise their votes the same way nor cast all their votes.
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 161 1.9. Voting 1.9.4. Lodgement of Proxy Forms Original Proxy Forms and the original or a certified copy of 1.9.1. Voting in person the power of attorney (if the form is signed by an attorney) To vote in person at the Meeting, you must attend the must be received in one of the following ways: meeting to be held on Wednesday 3 October 2012 at • Online The River Room, Stamford Plaza, corner Edward & CPF Unitholders may lodge their Proxy Form online via Margaret Streets, Brisbane commencing at 1pm. www.cromwell.com.au/cpfmerger If you plan to attend the Meeting please arrive at least • By post 30 minutes before the Meeting to allow time to note your attendance. Please bring the Proxy Form with you as Please use the reply paid envelope enclosed or address it contains a barcode that will enable registration to be your letter to: completed in a timely and efficient manner. Locked Bag A14 Sydney South 1.9.2. Voting by corporate representative NSW 1235 A company may appoint an authorised corporate Proxy Forms and a certified copy of the power of attorney representative to represent them at the Meeting and exercise (if the form is signed by an attorney) may also be delivered any of the powers the company may exercise at the Meeting. by facsimile to: (02) 9287 0309 The authorised corporate representative will be admitted to the Meeting and given a voting card upon providing, at 1.9.5. Timing of lodgement of Proxy Forms the point of entry to the Meeting, written evidence of their Proxy Forms and the original or a certified copy of the power appointment, of their name and address and the identity of of attorney (if the Proxy Form is signed by an attorney) must their appointer. be received by the Cromwell Registry by post, fax or online, 1.9.3. Voting by proxy or at the registered office of CPSL, Level 19, 200 Mary Street, Brisbane by no later than 1pm on Monday 1 October If you are a CPF Unitholder, you have the right to appoint a 2012 (or if the Meeting is adjourned, at least 48 hours before proxy in respect of the Meeting. Your proxy does not need the resumption of the Meeting in relation to the resumed to be a CPF Unitholder. You should complete and sign the part of the Meeting). personalised Proxy Form sent to you with this Explanatory Memorandum. The Proxy Form includes information about how it is to be completed. 1.10. More information If you are entitled to cast two or more votes you may appoint If you have any questions please read Section 2 on page 9 two proxies and may specify the proportion or number of and, if your question is not answered there, contact Cromwell votes each proxy is entitled to exercise. However, if you do Investor Services on 1300 276 693, Monday to Friday not specify the proportion or number of votes for each proxy, between 8:30am and 5:00pm or visit CPF’s website at then each proxy may exercise half of the votes. www.cromwell.com.au/cpfmerger. If you do not name a proxy, or your named proxy does not attend the Meeting, the Chairman will be your proxy and vote on your behalf. Your proxy has the same rights as you to speak at the Meeting and to vote. The appointment of a proxy will not preclude you from attending in person and voting at the Meeting.
162 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 7 Supplemental Deed
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 163 Supplemental Deed
Cromwell Property Fund ARSN 119 080 410
Cromwell Property Securities Limited ACN 079 147 809 (Manager)
MinterEllison LAWYERS
AURORA PLACE, 88 PHILLIP STREET, SYDNEY NSW 2000, DX 117 SYDNEY TEL: +61 2 9921 8888 FAX: +61 2 9921 8123 www.minterellison.com
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164 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Supplemental Deed Cromwell Property Fund
Details 3
Terms 4 1. Defined terms 4 2. Amendment of the Constitution 4 3. Operation of this deed 11 4. Governing law and jurisdiction 12
Signing page 13
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 165 Details
Date
Parties
Name Cromwell Property Securities Limited ACN 079 147 809 as responsible entity of Cromwell Property Fund ARSN 119 080 410 Short form name Manager Notice details Level 19, 200 Mary Street, Brisbane Queensland 4000 Attention: Company Secretary
Background
A The Manager is the responsible entity of the Cromwell Property Fund (Trust), which was established under a constitution dated 12 April 2006 as amended from time to time (Constitution).
B The Trust has been registered by the Australian Securities and Investments Commission (ASIC) as a managed investment scheme under section 601EB of the Corporations Act 2001 (Cth) (Corporations Act).
C The Manager and Cromwell Property Group (consisting of Cromwell Corporation Limited ACN 001 056 980 and Cromwell Property Securities Limited ACN 079 147 809 as responsible entity of Cromwell Diversified Property Trust ARSN 102 982 598 (CDPT RE) (Cromwell)) have agreed, by executing a merger implementation agreement dated 31 August 2012, to propose and implement an offer whereby CDPT acquires all of the units in the Trust that it does not already own (Merger).
D The Constitution needs to amended to facilitate the Merger.
E Under clause 21.1 of the Constitution, the Manager may modify, repeal or replace the Constitution by special resolution of the unitholders of the Trust.
F At a meeting convened in accordance with the Corporations Act and clause 13 of the Constitution, the unitholders of the Trust approved certain resolutions, including a special resolution to make the amendments to the Constitution contained in this deed.
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166 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Terms
1. Defined terms In this deed, unless a contrary intention is expressed or implied, words and expressions defined in the Constitution have the same meanings when used in this deed.
2. Amendment of the Constitution By this deed the Manager, pursuant to its powers under the Constitution and the Corporations Act, amends the Constitution as follows: (a) in clause 1.1 of the Constitution, by inserting the following definitions in alphabetical order: "CCL" means Cromwell Corporation Limited ACN 001 056 980. "CDPT" means Cromwell Diversified Property Trust ARSN 102 982 598. "CDPT RE" means Cromwell Property Securities Limited ACN 079 147 809 as responsible entity of CDPT. "Cromwell" means CCL and CDPT RE (or either of them, as applicable). "Cromwell Deed Polls" means the deed polls executed by CCL and CDPT RT respectively in favour of the Merger Unitholders. "Cromwell Registrar" means such suitably qualified person or persons that is from time to time appointed by Cromwell to operate the Cromwell Securityholder Register. "Cromwell Security" means a Cromwell Unit stapled to a Cromwell Share. "Cromwell Securityholder Register" means the register of holders of the Cromwell Securities from time to time, and as administered by Cromwell (or by the Cromwell Registrar on behalf of Cromwell). "Cromwell Share" means a fully paid ordinary share issued by CCL. "Cromwell Unit" means a fully paid ordinary unit in CDPT issued by the CDPT RE. "Effective Date" means the date on which this deed making amendments to this Constitution to facilitate the Merger, including the insertion of clause 32, takes effect pursuant to clause 20.2 of the Constitution. "Implementation Agreement" means the merger implementation agreement between Cromwell and the Manager dated 31 August 2012. "Implementation Date" means 4 October 2012 or such other date as the Manager may determine from time to time. "Ineligible Foreign Unitholder" means a Merger Unitholder whose address as shown in the Register as at the Record Date is a place outside Australia and its external territories, New Zealand and such other jurisdictions as Cromwell and the Manager agree to in writing. "Merger" means the arrangement by which all of the Merger Units will be transferred to the CDPT RE for the Merger Consideration, as set out in clause 32.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 167 "Merger Consideration" means 0.2298 Cromwell Securities for each CPF Unit on issue at the Implementation Date. "Merger Meeting" means the meeting of Unitholders held on or about 3 October 2012 to consider the Merger Resolutions, and includes any adjournment of that meeting. "Merger Resolutions" means resolutions of Unitholders to approve the Merger, being: (a) an ordinary resolution approving for all purposes, the acquisition by Cromwell of all the Merger Units; and (b) a special resolution for the purpose of subsection 601GC(1) of the Corporations Act to approve amendments to this Constitution to facilitate the Merger and to authorise the Manager to give effect to those amendments. "Merger Transfers" means in relation to each Merger Unitholder, a proper instrument of transfer of their Merger Units for the purpose of section 1071B of the Corporations Act (which may be a master transfer of all or part of all of the Merger Units). "Merger Unit" means a Unit on issue as at the Record Date, except any Unit held by CDPT RE (directly or indirectly) on the Record Date. "Merger Unitholder" means a person registered in the Register as a holder of Merger Units as at the Record Date, excluding CDPT RE (or a person who holds Merger Units on CDPT RE's behalf). "New Cromwell Security" means a Cromwell Security to be issued to, or at the direction of, Merger Unitholders under the Merger. "Nominee" means a nominee appointed by Cromwell. "Record Date" means 5pm at 1 October 2012 or such other time and date as the Manager may determine from time to time. "Registered Address" means, in relation to a Merger Unitholder, the address of that Merger Unitholder shown on the Register. "Registrar" means such suitably qualified person or persons that are from time to time appointed by the Manager to operate the Register. (b) after clause 31 of the Constitution, inserting the following new clause 32: "32 Merger 32.1 Implementation of Merger (a) Each Merger Unitholder and the Manager must do all things and execute all deeds, instruments, transfers or other documents as the Manager considers are necessary or desirable to give full effect to the terms of the Merger and the transactions contemplated by it. (b) Without limiting the Manager's other powers under this clause 32, the Manager has power to do all things that it considers necessary or desirable to give effect to the Merger and the Implementation Agreement. (c) Subject to the Corporations Act, the Manager and Cromwell or any of their respective directors, officers, employees or associates may do any act, matter or thing described in or contemplated by this clause 32 even if they have an interest (financial or otherwise) in the outcome. (d) This clause 32:
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168 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting (i) binds the Manager and all of the Unitholders from time to time (including those who do not attend the Merger Meeting, those who do not vote at the Merger Meeting and those who vote against the Merger Resolutions); and (ii) to the extent of any inconsistency, overrides the other provisions of this Constitution. 32.2 Entitlement to Merger Consideration Subject to clause 32.5, each Merger Unitholder will be entitled to receive the Merger Consideration for each Merger Unit held by that Merger Unitholder, which is to be issued in the manner referred to in clause 32.3. 32.3 Provision of Merger Consideration (a) The obligation of the Manager to procure Cromwell to provide the Merger Consideration to a Merger Unitholder will be satisfied by the procuring Cromwell, before 12.00pm on the Implementation Date: (i) to issue to that Merger Unitholder such number of New Cromwell Securities to which that Merger Unitholder is entitled as Merger Consideration pursuant to the Merger; and (ii) to procure the entry in the Cromwell Securityholder Register of the name and Registered Address (as at the Record Date) of that Merger Unitholder and the number of New Cromwell Securities which that Merger Unitholder is entitled to receive under the Merger, but subject always to clause 32.5. (b) The Merger Unitholders acknowledge and agree that, subject to clause 32.5, within 3 Business Days after the Implementation Date, the Manager will procure that Cromwell will despatch, or procure the despatch, to each Merger Unitholder whose relevant New Cromwell Securities are held on the issuer sponsored subregister of Cromwell, of an uncertificated holding statement in the name of that Merger Unitholder for the New Cromwell Securities issued to that Merger Unitholder pursuant to the Merger, with such despatch to be made by pre-paid post to that Merger Unitholder's Registered Address (as at the Record Date). (c) In the case of Merger Units held in joint names, holding statements for New Cromwell Securities must be issued in the names of joint holders and sent to the holder whose name appears first in the Register on the Record Date. 32.4 Transfer of Merger Units to CDPT RE On the Implementation Date, subject to Cromwell having provided the Merger Consideration in the manner contemplated by clause 32.3 and Cromwell having provided the Manager with written confirmation of that having occurred, the following will occur: (a) all of the Merger Units, together with all rights, entitlements and obligations attaching to the Merger Units as at the Implementation Date, will be transferred to the CDPT RE, without the need for any further act
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 169 by any Merger Unitholder, other than acts performed by the Manager (or any of its directors and officers appointed as sub-attorneys and/or agents of the Manager) as attorney and/or agent for Merger Unitholders under the Merger; (b) the Manager will procure the delivery to CDPT RE for execution duly completed and, if necessary, stamped Merger Transfers to transfer all of the Merger Units to Cromwell, duly executed by the Manager (or any of its directors and officers appointed as sub-attorneys and/or agents of the Manager) as the attorney and/or agent of each Merger Unitholder as transferor under clause 32.10; (c) CDPT RE must immediately execute the Merger Transfers as transferee and deliver them to the Manager for registration; and (d) the Manager, immediately after receipt of the Merger Transfers under paragraph (c), must enter, or procure the entry of, the name and address of CDPT RE in the Register as the holder of all of the Merger Units. 32.5 Ineligible Foreign Unitholders (a) Any entitlement that an Ineligible Foreign Unitholder at the Record Date would otherwise have to receive the New Cromwell Securities will be satisfied by Cromwell issuing such New Cromwell Securities to the Nominee as the nominee for those persons. Each Ineligible Foreign Unitholder acknowledges and agrees that Cromwell will be under no obligation under the Merger to issue, and will not issue, any New Cromwell Securities to Ineligible Foreign Unitholders. (b) Cromwell will procure that, as soon as reasonably practicable and in any event not more than: (i) 15 Business Days after the Implementation Date, the Nominee sells all of the New Cromwell Securities issued to the Nominee pursuant to clause 32.5(a) in such manner, at such price and on such other terms as the Nominee determines in good faith; and (ii) 20 Business Days after the Implementation Date, the Nominee remits to the relevant Ineligible Foreign Unitholders the proportion of the net proceeds of sale (rounded to the nearest cent, after deducting any applicable brokerage, stamp duty and other selling costs, taxes and charges) to which that Ineligible Foreign Unitholder is entitled. 32.6 Fractional entitlements If a number of Merger Units held by a Merger Unitholder as at the Record Date is such that the aggregate entitlement of that Merger Unitholder to scheme Consideration includes a fractional entitlement to a cent in cash, then the entitlement of that Merger Unitholder must be rounded: (a) where the fraction is 0.5 is greater - up; and (b) where the fraction is less than 0.5 – down, to the nearest whole number, with any fractional entitlement being disregarded.
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170 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 32.7 Dealings in Units (a) For the purpose of establishing the persons who are Merger Unitholders and determining entitlements to the Merger Consideration, dealings in Units will only be recognised if registrable transfers or transmission applications in respect of those dealings are received by the Registrar by the Record Date. (b) The Manager will register registrable transfers or transmission applications of the kind referred to in paragraph (a) by, or as soon as practicable after, the Record Date. The persons shown in the Register, and the number of Units shown as being held by them, after registration of those transfers and transmission applications will be taken to be the Merger Unitholders and the number of Merger Unit held by them, as at the Record Date. (c) The Manager will not accept for registration nor recognise for any purpose (including the purpose of establishing the persons who are Merger Unitholders), any transfer and transmissions application in respect of Units received after the Record Date, or received prior the Record Date but not in registrable form. (d) The Manager will, until the Merger Consideration has been provided and the name and address of the CDPT RE have been entered in the Register as the holder of all of the Merger Units, maintain, or procure the maintenance of, the Register in accordance with this clause 32.7. The Register immediately after registration of registrable transfers or transmission applications of the kind referred to in paragraph (a) will solely determine the persons who are Merger Unitholders and their entitlements to the Merger Consideration. (e) Other than CDPT RE (after registration of CDPT RE in respect of all Merger Units under clause 32.4(d)), no Merger Unitholder (or any person purporting to claim through them) may deal with Merger Units in any way after the Record Date except as set out in this clause 32, and any attempt to do so will have no effect. (f) On or before 12pm on the Implementation Date, the Manager must ensure details of the names, Registered Addresses and holdings of Merger Units of every Merger Unitholder as shown in the Register as at the Record Date are given to Cromwell (or as it directs) in such form as Cromwell may reasonably require. (g) Each Merger Unitholder, and any person claiming through that Merger Unitholder, must not dispose of or purport or agree to dispose of any Merger Units or any interest in them, after the Record Date. 32.8 Covenants by Merger Unitholders Each Merger Unitholder: (a) acknowledges that this clause 32 binds Cromwell and all of the Unitholders from time to time (including those who do not attend the Merger Meeting, do not vote at the Merger Meeting or vote against the Merger Resolutions);
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 171 (b) irrevocably agrees to the transfer of their Merger Units, together with all rights, entitlements and obligations attaching to those Merger Units to Cromwell in accordance with the terms of the Merger; (c) agrees to the modification or variation (if any) of the rights attaching to their Merger Units arising from this clause 32; (d) irrevocably consents to the Manager and Cromwell doing all things and executing all deeds, instruments, transfers or other documents (including the Merger Transfers) as may be necessary or desirable to give full effect to the terms of the Merger and the transactions contemplated by it; (e) agrees to provide to the Manager such information as the Manager may reasonably require to comply with any law in respect of the Merger and the transactions contemplated in this clause 32, including information required to meet obligations under the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth); and (f) to whom New Cromwell Securities are to be issued pursuant to the Merger: (i) irrevocably agrees to become a member of CCL and CDPT, and to have their name and address entered in the Cromwell Securityholder Register; and (ii) irrevocably accepts the New Cromwell Securities issued pursuant to the Merger on the terms and conditions of the constitution of CCL and the constitution of CDPT and agrees to be bound by the constitution of CCL and the constitution of CDPT as in force from time to time in respect of the New Cromwell Securities, without the need for any further act by that Merger Unitholder. 32.9 Appointment of the Manager as attorney and as agent for implementation of Merger (a) Each Merger Unitholder, without the need for any further act by that Merger Unitholder, irrevocably appoints the Manager as that Merger Unitholder's attorney and as that Merger Unitholder's agent for the purpose of: (iii) doing all things and executing all deeds, instruments, transfers or other documents (including the Merger) as may be necessary or desirable to give full effect to the terms of the Merger and the transactions contemplated by it, including: (A) executing any form of application required for the New Cromwell Securities to be issued to that Merger Unitholder in accordance with the Merger; (B) effecting a valid transfer or transfers of the Merger Units to Cromwell under clause 32.4(b), including executing and delivering any Merger Transfers; (C) communicating the Merger Unitholder's instructions and notifications under clause 32.13; (iv) enforcing the Cromwell Deed Poll against Cromwell,
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172 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting and the Manager accepts such appointment. (b) The Manager, as attorney and as agent of each Merger Unitholder, may sub-delegate its functions, authorities or powers under this clause 32.9 to all or any of its directors and officers (jointly, severally, or jointly and severally). (c) Each Merger Unitholder indemnifies the Manager and each of its directors and officers against all losses, liabilities, charges, costs and expenses arising from the exercise of powers under this clause 32.9. 32.10 Appointment of Cromwell as attorney and as agent for Merger Units (a) From the Effective Date until CDPT RE is registered in the Register as the holder of all Merger Units, each Merger Unitholder: (i) without the need for any further act by that Unitholder, irrevocably appoints the Manager as it its attorney and as its agent (and directs the Manager in such capacity) to irrevocably appoint the chairman of the board of directors of CDPT RE (or other nominee of the CDPT RE) as its sole proxy and, where applicable, corporate representative, for the purpose of: (A) attending Unitholder meetings; (B) exercising the votes attaching to the Units registered in the name of the Merger Unitholder in the Register; and (C) signing any Unitholders' resolution; and (ii) must take all other action in the capacity of a Merger Unitholder for the purposes of facilitating the Merger as Cromwell reasonably directs. (b) From the Effective Date until CDPT RE is registered in the Register as the holder of all Merger Units, subject to the Corporations Act, no Unitholder may attend or vote at any meetings of Unitholders or sign any Unitholders' resolution (whether in person, by proxy or by corporate representative) other than under this clause 32.10. (c) The Manager undertakes in favour of each Merger Unitholder that it will appoint the chairman of the board of directors of CDPT RE (or other nominee of the CDPT RE) as the Merger Unitholders' proxy or, where applicable, corporate representative in accordance with this clause 32.10. 32.11 Status of Merger Units (a) To the extent permitted by law, the Merger Units transferred to the CDPT RE under this clause 32 will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise. (b) Each Merger Unitholder is deemed to have warranted to the Manager in its own right and on behalf of Cromwell, that all their Merger Units including any rights, entitlements and obligations attaching to those Merger Units), which are transferred to CDPT RE under this clause 32 will, at the time of the transfer of them to Cromwell, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 173 any kind, whether legal or otherwise, and restrictions on transfer of any kind not referred to in this Constitution, and that they have full power and capacity to sell and to transfer their Merger Units (together with any rights, entitlements and obligations attaching to those Merger Units) to CDPT RE pursuant to the Merger. (c) CDPT RE will be beneficially entitled to the Merger Units transferred to it under this clause 32 pending registration by the Manager in the Register of CDPT RE as the holder of the Merger Units. 32.12 Binding instructions or notifications Except for a Merger Unitholder's tax file number, any binding instruction or notification between a Merger Unitholder and the Manager relating to Merger Units as at the Record Date (including, without limitation, any instructions relating to payment of distributions or to communications from the Manager) will, from the Record Date, be deemed (except to the extent determined otherwise by Cromwell in its sole discretion) to be a similarly binding instruction or notification to, and accepted by, Cromwell in respect of any New Cromwell Securities issued to the Merger Unitholder pursuant to the Merger, until that instruction or notification is revoked or amended in writing addressed to Cromwell provided that any such instructions or notifications accepted by Cromwell will apply to and in respect of the issue of New Cromwell Securities as part of the Merger Consideration only to the extent that they are not inconsistent with the other provisions of the Merger. 32.13 Notices Where a notice, transfer, transmission application, direction or other communication referred to in the Merger is sent by post to the Manager, it will not be deemed to be received in the ordinary course of post or on a date other than the date (if any) on which it is actually received at the Trust's registered office or by the Registrar, as the case may be. 32.14 Costs and stamp duty (a) Subject to paragraph (b), each of Cromwell and the Manager will pay their share of the costs of the Merger in accordance with the Implementation Agreement. The Manager may pay or be reimbursed for such costs out of the Assets of the Trust Fund. (b) Cromwell will pay all stamp duty (including fines, penalties and interest) payable on or in connection with the transfer by Merger Unitholders to Cromwell pursuant to the Merger. 32.15 Limitation of liability Without limiting clause 7, subject to the Corporations Act, the Manager will not have any liability of any nature whatsoever to Unitholders, beyond the extent to which the Manager is actually indemnified out of the Assets of the Trust Fund, arising, directly or indirectly, from the Manager doing or refraining from doing any act (including the execution of a document), matter or thing pursuant to or in connection with the implementation of the Merger. "
3. Operation of this deed 3.1 Effective date This deed will take effect on the date and time on which a copy of this deed is lodged with ASIC.
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174 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 3.2 No redeclaration etc The Trustee confirms that it is not, by clause 2 of this deed: (a) redeclaring the Trust; (b) resettling the Trust; (c) causing the transfer, vesting or accruing of property in any person; or (d) entering into a new constitution. 3.3 Remaining provisions unaffected Except as specifically amended by this deed, all terms and conditions of the Constitution remain in full force and effect. With effect from the effective date of this deed, the Constitution amended by this deed is to be read as a single integrated document incorporating the amendment effected by this deed.
4. Governing law and jurisdiction This deed is governed by the laws of Queensland. The Trustee irrevocably submits to the non- exclusive jurisdiction of the courts of Queensland.
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Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 175 Signing page
EXECUTED as a deed poll.
Executed by Cromwell Property Securities Limited ACN 079 147 809 as responsible entity of Cromwell Property Fund in accordance with Section 127 of the Corporations Act 2001 ← ← Signature of director Signature of director/company secretary (Please delete as applicable)
Name of director (print) Name of director/company secretary (print)
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176 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Annexure 8 Deed Polls
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 177 178 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 179 180 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 181 182 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 183 184 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 185 186 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 187 188 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 189 190 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 191 192 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 193 NOTES
194 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting
Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting 195
196 Cromwell Property Fund | Explanatory Memorandum & Notice of Meeting www.cromwell.com.au/cpfmerger